Macro Variables in Factor Exposure Analysis

Boosting the R2?

June 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Most investors treat factor and macro variables differently
  • Including macro variables improves a factor exposure analysis
  • Both should be considered simultaneously when analyzing investment portfolios


The investment world is full of conundrums. For example, discussions on investment portfolios usually focus on the impact of change in inflation, interest rates, economic growth, and other macro variables. However, the most frequent type of portfolio analysis is a factor exposure analysis, where the exposure to equity factors like value or momentum is determined. Oddly, there are few follow on discussions on how value will perform and what the impact on the portfolio will be.

Factor exposure and macro scenario analysis are typically regarded as separate types of analysis, although these can be combined. It is straightforward to measure the exposure to equity factors as well as macroeconomic variables. Naturally, this is more relevant to cross-asset rather than pure equity portfolios (read Musings about Factor Exposure Analysis).

In this research article, we will explore adding macro variables to a factor exposure analysis of asset allocation portfolios. 


We select 20 ETFs traded in the U.S. stock market that represent asset allocation strategies, which include tactical and less dynamic ones. This differentiation is not easy, but exactly where factor exposure can be helpful to quantify the magnitude of changes to asset classes. We create the following two groups, each consisting of 10 ETFs:

  • Core Asset Allocation ETFs: iShares Core Growth Allocation ETF (AOR), iShares Core Moderate Allocation ETF (AOM), iShares Core Aggressive Allocation ETF (AOA), iShares Core Conservative Allocation ETF (AOK), SPDR SSgA Global Allocation ETF (GAL), ClearShares, OCIO ETF (OCIO), Invesco Balanced Multi-Asset Allocation ETF (PSMB), Invesco Growth Multi-Asset Allocation ETF (PSMG), Invesco CEF Income Composite ETF (PCEF), Multi-Asset Diversified Income Index Fund (MDIV)
  • Tactical Asset Allocation ETFs: First Trust Dorsey Wright DALI 1 ETF (DALI), Premise Capital Diversified Tactical ETF (TCT