Factor Exposure Analysis 114: Factor Offsetting
Better to bet on fewer rather than many factors
April 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Many factors feature structural negative correlations to others
- Combining smart beta strategies often leads to factor offsetting or doubling up
- Broad multi-factor products are not a solution, investors should take fewer factor bets
INTRODUCTION
JP Morgan’s Strategic Asset Allocation model included allocations to both global value and global technology funds as of the end of 2024. At first glance, this may seem like a balanced approach. However, a closer look reveals that these allocations represent opposing investment styles.
Value stocks are often struggling companies with declining sales and earnings, typically from traditional industries with high debt levels. In contrast, technology stocks tend to exhibit strong growth, low leverage, and high future potential.
Blending these two opposing styles can dilute their individual strengths – much like mixing hot and cold water results in lukewarm temperature. Yet, this approach is not unique to JP Morgan; many investors unknowingly combine strategies that cancel each other out, particularly in factor investing.
In this research note, we explore how popular smart beta strategies can lead to unintended factor offsetting.
VALUE VERSUS GROWTH FUNDS
We conducted a factor exposure analysis on Vanguard’s Value Index Fund (VTV) and Growth Index Fund (VUG) using a Lasso regression. These two funds together manage nearly $300 billion in assets. VTV selects undervalued stocks, while VUG focuses on growth stocks within the large-cap U.S. market. As a result, VTV shows a strong positive exposure to the value factor but a significant negative exposure to the quality factor – while VUG exhibits the opposite pattern.
