It is often said that RZV (Guggenheim S&P SmallCap 600 Pure Value) may not be a good choice for Small Value because it has negative momentum.

I went to PortfolioVisualizer and compared several small value funds to obtain the factor loadings. I started in October 2012 because that is when Vanguard switched its small value fund to the CRSP index. The results are linked:

https://portfoliovisualizer.com/fac ... sion=false.

As you can see, RZV has a momentum loading of -0.31, with a p-value of 0.002.

But what if we specify the model differently? The results of using the 4-factor AQR model with the HML-DEV factor are linked: https://portfoliovisualizer.com/fac ... sion=false.

Notice how now we get the following momentum loadings for the funds:

VBR: 0.19, p-value 0.007

IJS: 0.14, p-value 0.084 (not significant)

RZV: -0.08, p-value 0.535 (not significant)

DFSVX: 0.21, p-value 0.017

Thus, the AQR model is suggesting that RZV does not have negative momentum, and furthermore, that VBR and DFSVX have a mild momentum load.

Let's now add the AQR QMJ (Quality Minus Junk) factor, and we get these: https://portfoliovisualizer.com/fac ... sion=false.

Now we get the following loadings on Momentum and QMJ:

VBR: 0.21 MOM load; 0.24 QMJ load

IJS: 0.18 MOM load; 0.56 QMJ load

RZV: -0.03 MOM load; 0.67 QMJ load

DFSVX: 0.24 MOM load; 0.46 QMJ load

Note that RZV has negative alpha, but it is not statistically significant.

Now let's add the AQR BAB (Bet Against Beta/Low Volatility) factor and get: https://portfoliovisualizer.com/fac ... sion=false:

The results are similar as with the previous regression, but now the RZV fund seems to have a negative load to BAB. For RZV we have:

RZV: Mom: 0.11; QMJ: 0.72; BAB: -0.38; with the momentum estimate the only one that is not statistically significant.

So the above raises several questions on my mind. Does RZV really have a negative momentum load? Could some of the conventional small value funds, such as VBR, have a mild momentum load? Any thoughts?

## Momentum Loadings on Small Value Funds

- privatefarmer
**Posts:**276**Joined:**Mon Sep 08, 2014 2:45 pm

### Re: Momentum Loadings on Small Value Funds

smoke and mirrors man, smoke and mirrors. you're trying too hard here. momentum is something that can easily be arbitraged away by the big boys. i would not put so much effort into this IMO, if you want to own SCV I would just own VBR as it is the cheapest.

- oldcomputerguy
**Posts:**1973**Joined:**Sun Nov 22, 2015 6:50 am**Location:**In the middle of five acres of woods

### Re: Momentum Loadings on Small Value Funds

First thing that went through my mind: didn't understand a word.

I guess I'm not smart enough to follow this sort of analysis. I'll just stick with my broad-market index funds.

I guess I'm not smart enough to follow this sort of analysis. I'll just stick with my broad-market index funds.

Anybody know why there's a 20-pound frozen turkey up in the light grid?

- in_reality
**Posts:**4270**Joined:**Fri Jul 12, 2013 6:13 am

### Re: Momentum Loadings on Small Value Funds

What you have discovered is that measurement of factor loadings is extremely imprecise.

To the degree that I question the assertion that they are truly "independent".

In your analysis of RZV, there is a range of loadings.

Market 1.05 to 1.21

Size 1.03 to 1.54

Value 0.4 to 0.55

Momentum -0.31 to 0.11

Quality 0.67 to 0.72

Alpha -0.27 to 0.09

So not only is there a range in loadings that depends on what other factors you are measuring, but there is also the catchall category Alpha which has anything unexplained.

If the model really worked, I would expect Market loadings to be constant and that if you weren't measuring for quality, that the explanatory power of would be tallied in alpha. This obviously is not the case.

In any case, the claim by factor proponents is that Market exposure is independent of other factors. I don't see that in the numbers though.

To answer your question then, could RZV have a positive or zero momentum? When momentum is at it's highest (0.11) in the AQR BAB (Bet Against Beta/Low Volatility) model, there are also lower loadings on Market, Size, and Value. Could some of those returns be misattributed to momentum? I think yes.

Also, RZV seems to have higher quality and lower alpha when measuring for those things than other funds. So is quality really being measured correctly or is some of it going into alpha?

So yes, RZV can show positive momentum. Is that what is really is though? For all we know, Market, Size, Value, Low Beta, Quality or Alpha could be tallying in the momentum column for that particular model.

### Re: Momentum Loadings on Small Value Funds

I think in_reality has the gist of it here. While I am a factor nerd, I am not a factor expert but I do know that many of these factors are correlated. So when you start including more of them, the prior factor loadings can change. I don't think what you are finding is that unexpected. IMO, factor loadings around 0.1 or less are basically noise.

Would be curious to hear what those more expert than I think.....

Would be curious to hear what those more expert than I think.....