How to Use the Fund Factor Regression Tool on PV

Mailbag Q&A on Risk Parity Radio episode 242 from friend of the blog Alexi inadvertently presents me with a challenge: produce a simple guide to using the Fund Factor Regression tool on our beloved Portfolio Visualizer. Challenge accepted!… Here’s my 14 minute explainer.

One of the main missions of RPC is to find ways to boost the signal of Risk Parity Radio, the centerpiece and beacon of this small but committed band of Risk Parity enthusiasts. Radio is a great medium, but not for all things, of course, so I’m always on the lookout (hear-out?) for cases where I can add my two cents to a topic and add some value, mostly because a blog and a YouTube channel allow me to do what radio just can’t..

Such an occasion popped up on February 12th in which friend of the show and the blog Alexi wrote in talking about a tool he uses to zero in on factor exposure in mutual funds and ETFs. The snippet is from 2’53” until 6’26” - this whole thing will make more sense if you give it a listen:

Episode 242: Lemmy Joins Some Of The Regulars For Q&A And Portfolio Reviews As Of February 10, 2023 — Risk Parity Radio — Overcast
Risk Parity Radio, episode 242. Start at 2'53"

In short, when Alexi wants a momentum fund, for example, he wants the fund which is the most momentum-y. Extending the point, if you do decide to go for small-cap value, or large-cap growth, you’d want to find the fund that focuses on those factors the most.

Thanks to the wonderful site Portfolio Visualizer, just such a tool is available to DIY investors: the Fund Factor Regression tool, under the Factor Analysis banner. Our intrepid host, Frank, says the tool is a good one but can also be a bit daunting.

True, but it need not be! Here is a quick video I made showing you how to use it. I hope it helps!

Please excuse my bungling of the explanation of r-squared around the ten minute mark. I liked the take I recorded except for that, so I just inserted a little clarification before the flub.

Little Bit on Factor Investing

As I said in the video, factor investing is pretty complicated, and it's basically impossible to explain it simply and comprehensively at the same time. Sorry, I won’t try here - but here are some next steps for you.

Here is the Investopedia article about it:

Factor Investing: What You Need to Know
Factor investing is looks at statistical similarities among investments to identify common factors to leverage in an investing strategy.

Great video by Ben Felix of Common Sense Investing and the podcast The Rational Reminder. The channel and podcasts are both great places if you want to extend your knowledge:

And if you want the straight dope, here is the seminal paper from Gene Fama and Ken French which started it all:

Finally, here is my table naming the factors, for your reference: