Quantitative Investments
Do you know that Quantitative Investment Strategies have significantly outperformed the S&P 500 in bull and bear markets over the past 20 years?
In a world where technology has changed nearly every facet of our everyday life, fund managers and investment banks have aimed to get a leg up on their peers, employing quantitative analysts (“quants”) to build superior trading strategies. The work that these quants perform is called quantitative analysis. It involves building complex computer models to parse through massive data banks to build trading strategies. These strategies can search for specific trading patterns to predict the direction of securities, and or specific ratios or combinations of ratios like Price-To-Earnings (P/E), and Debt-To-Equity to spot inefficiencies in the market before others do.
The ultimate goal of these proprietary models is to generate superior returns while maintaining rigid risk control. There are more than 65 quant ETFs to choose from, as well as a large number of quant mutual funds.
Why use Quantitative Investment Strategies?
Given that computers can analyze large groups of investments simultaneously and implement screening processes to rank them, they clearly have a significant advantage over the average individual investor or research team. Not only can they crunch enormous volumes of data at a rapid pace, but they can rank this data objectively. This is a massive benefit, as the results derived from the models are void of confirmation bias. Of course, the benefit of consistency and objectivity is only as good as the quants running the strategy.
The other major advantage is discipline, with quant trading strategies not subject to emotion when executing trades. Allowing human emotion to seep into a given strategy can weigh significantly on investment returns and is often the downfall of the average individual investor. There is clear evidence of this outperformance in historical returns, with the average quant fund returning more than 15% annualized over the past twenty years, well above the returns of the S&P-500 (7%). The best quant funds have returned closer to 19% annualized over the past 20 years, and have also outperformed since the secular bear market bottom of 2009.
While there are clear benefits to quantitative strategies, there are risks, with the major one being the shortcomings of relying on historical data. As we saw in 2020, the humans beat the quants with the top-10 performing hedge funds dominated by stock-pickers with returns ranging from 30% to 74%. This shouldn’t be overly surprising as there’s no way to model a once-in-a-century event like a global pandemic.
Quantitative vs. Qualitative
Quantitative analysis focuses on information about quantities, and therefore numbers.Quantitative Investment Strategies are governed by sets of rules and are typically rigid, aiming to deliver higher returns by uncovering inefficiencies in the market. Many of these models typically involve analyzing balance sheets, cash flow statements, and ranking stocks based on relative attractiveness to build portfolios. Other Quantitative Investment Strategies use patterns to predict market direction, or combining dozens of inputs together. These strategies can include mean reversion and momentum, relying mostly on technical signals for their inputs.
Qualitative analysis focuses on data that is descriptive, which can be observed but not measured. Qualitative Investment Strategies focus on the qualitative characteristics of both stocks and assets, and this analysis is much more subjective. This could involve personal views on a currency or global market related to a projected shift in monetary policy or taxation, or views on a stock’s eventual profitability based on its new product, or the hiring of a new Chief Executive Officer or Chief Operating Officer.
While quantitative funds have outperformed many non-quantitative funds over the past 20 years, the importance of qualitative analysis should not be minimized. This is because even if a company has a superior product or service, it could fail miserably without the right management team, the right management style, entry into the wrong market, or adverse upcoming changes in government regulation/taxation. Given the ever-changing landscape and disruption to many industries, qualitative analysis can often spot potential value traps much better than a quantitative strategy that dispassionately focuses solely on financial statements, and not the big picture.
How to Invest Using Quantitative Investment Strategies
The massive benefits of quantitative investment strategies cannot be understated, with the average quant fund easily outperforming the S&P-500 over the past 20 years, with a (+) 15% annualized return. Some of the major pros and cons worth considering are as follows:
PROS
- Less scope for human error, with mathematical models taking care of stock selection, and risk control.
- Dispassionate decision making, with investors not missing out on opportunities due to their inherent biases or the biases of their fund managers.
- Systematic transaction timing, with quant strategies being able to navigate volatile markets without being exposed to fear or greed, which plagues most individual investors, and even some of the best fund managers occasionally.
CONS:
- Quant funds are only as good as the humans that run them, so quant fund managers should be vetted just as much as the strategy.
- Quant funds might be able to decipher the past 50 years better than any group of humans, but they struggle to predict the next 10 years, and lack the creative abilities of typical fund managers.
- Quant funds are less likely to pay attention to important qualitative aspects like company culture, leadership quality, and the regulatory, environmental landscape, which cannot be ignored in an increasing ESG-focused market landscape.
Given that there are dozens of different quantitative investment strategies out there, and tens of thousands of different variations, knowing which quant strategy to employ is not easy. The solution for those looking to profit from quantitative investment strategies is investing in quant ETF and mutual funds with proven track records and decades of data, which have uncovered the superior blend of strategies to fit most market cycles. A simple search on Magnifi indicates numerous ways for investors to access Quantitative Investment Strategies with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 27, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Space
A new space age is upon us. For the first time in human history, tech startups and private companies, spearheaded by some of the wealthiest entrepreneurs in the world, are sending humans into space.
The investing opportunities the space industry offers are massive. From space tourism to satellite broadband, mining to national security, in the coming decades an entire space economy will be created.
What is the Space Industry?
The space industry is composed of companies that manufacture components that will go into the Earth’s orbit and beyond, as well as the services associated with space travel. There are three major categories in the space industry: spacecrafts, ground support equipment, and the launch industry.
Spacecrafts are vehicles, manned and unmanned, used in space. These vehicles support a variety of applications, such as exploration, communications, navigation, and transportation. The industry includes satellites, space probes, cargo transporters, rovers, and software.
Ground support refers to the equipment used to service spacecraft. It includes manufacturing of control stations, mobile terminals, VSATs, gateways, and specialized equipment manufacturers.
The launch industry focuses on the process by which spacecraft are launched from our planet into space. It includes equipment, machinery, and launching vehicles, as well as the services that go along with it.
Why Invest in the Space Industry?
The space industry is growing rapidly. Morgan Stanley estimates that the global space industry could generate revenue of more than $1 trillion or more in 2040, up from $350 billion, currently. Bank of America’s forecasts are even more ambitious, estimating a $1.4 trillion-dollar market by 2030.
These impressive growth estimates are a direct result of the changes in the economics of space travel. According to NASA, launch costs that had held steady over the 30 year period between 1970 and 2000 have fallen by a factor of seven. It now costs just $432 to send one pound into low earth orbit in 2020, compared to an estimated $38,734 in the early 1980s.
Costs have plummeted due to the creation of equipment and vehicles that are more reliable, adaptable, and efficient. Many of the rockets that are launched today are reusable and the size of satellites have shrunk dramatically.
The rapid decline in the cost of satellites will soon bring a surge in the number of orbiters collecting data. That data can then be used by businesses for everything from predicting the weather to facilitating insurance claims.
Another potential opportunity is mining in space. NASA recently awarded contracts to four companies to extract tiny amounts of lunar regolith (loose unconsolidated rock and dust) by 2024. This could open up the potential for both moon mining, and asteroid mining, with work already being conducted on NASA’s Psyche Spacecraft to study an asteroid with an estimated mineral value measured in the quadrillions of dollars.
As a result, commercial space ventures are drawing record levels of funding as investors rush to tap into the market. Total venture capital investment in the space industry increased by 95% to $8.7 billion from 2020 to 2021. This increase of investment is an indication that private capital markets understand the potential of the space industry.
How to Invest in the Space Industry
Selecting individual stocks in the space industry can be challenging. That’s because most of the public names offering exposure to the industry have limited exposure as a percentage of future revenue, and those laser-focused on conquering the industry are private. This is why the best solution is gaining exposure to the sector through space-focused ETFs. A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 14, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Technology
Why should you invest in Technology?
The history of technology is the story of humankind. It covers the expanse of
humanity’s efforts to control its environment for its benefit by creating tools.
Tools/technology are things constructed to aid humans to solve problems and improve their lives.
One of the earliest applications of technology was the invention of the wheel. This basic, simple tool revolutionized the lives of humans, making it easier to go from one place to the other.
Fast forward to today and technology (which is simply applied science) of all sorts has infiltrated every aspect of our lives and is the major force for economic growth.
What Is the Technology Sector?
The technology (tech) sector includes companies involved with the research, development and distribution of technologically-based goods and services. The technology industry today is incredibly broad, covering all sorts of scientific disciplines.
The tech sector is categorized into three major industry groups: software and services, technology hardware and equipment, and semiconductors and semiconductor equipment. These three industry groups are further divided into industries and sub-industries.
Another way investors categorize the tech sector is by determining who the intended user of the product or service being offered is: consumer or a business? Consumer goods could mean anything from mobile devices, wearable technology, household appliances and electronics. While businesses rely heavily on technology to create enterprise software, streamline their systems, host their databases, store their information, etc. Modern businesses could not exist without technology.
Why Invest in Technology?
The world has undergone a technology revolution every 40 to 60 years since the industrial revolution began in 1760, from steam power and railways, to steel and electricity to cars, roads and aviation.
Each of these technological advancements brought sweeping economic change. They spawned new business models and created waves of new entrepreneurs. They also displaced old industries, triggered speculative financial bubbles and sometimes even brought social and political upheaval.
Today, the impact of the information and communications technology revolution is arguably the greatest ever. That has led to one undeniable truth: technology bears a far greater influence on our daily lives and investment portfolios than it ever has.
It’s near impossible to design a well-balanced investment portfolio without including tech stocks, as it is by far the largest sector of the U.S. stock market. But there is no reason to avoid it. There is no sector of the modern American economy that technology does not touch and that does not rely upon the tech sector to improve its quality, productivity, and profitability.
Many tech stocks have higher valuations than companies in other sectors. But for good reason. More than anything else, tech companies are associated with innovation and invention. Investors expect big money to be spent on research and development and they also expect to be rewarded by a steady stream of growth, fueled by a pipeline of innovative new products, services, and features.
Of course, there are risks. The tech sector is highly competitive, so any tech firm is at risk of having its product or service replaced by one from a competitor that is better.
However, tech stocks also promise significantly higher than average growth when compared to other equities.
This has been the prevailing trend for decades now. Throughout much of this century’s historic bull market, tech stocks have been leading the way, with the biggest tech stocks outperforming the S&P 500 index over the past 10 years.
How to Participate in Tech Investing
First, invest in what you like. Technology is an intriguing topic to many people, which makes investing in tech stocks interesting. Successful investing involves detailed research. When you enjoy the topic of your research, you’re more likely to do the legwork required to make educated investing decisions.
Second, keep in mind that the tech sector is massive and broad. It covers a wide range of companies in different stages of development. So there is plenty of room for diversification within the tech sector (you can read our articles on AdTech, Biotech, Fintech, Nanotechnology, or Insurance Technology).
If you’re a novice investor or you simply don’t have the time to do the research it takes to pick stocks individually, you may want to look toward technology-focused index funds, exchange-traded funds (ETFs), and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access tech funds with low fees.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 13, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Fixed Income Investments
What Is Fixed Income Investing?
Fixed income investing is a strategy that focuses on capital preservation and consistent income. This income may come in the form of interest payments or dividends.
Fixed income investments typically include: certificates of deposit (CDs), government and corporate bonds, money market funds and fixed-rate annuities. Bonds can be bought individually or through exchange traded funds and mutual funds.
These investments are among the safest. Therefore, their return is relatively low. However, many people – such as those in retirement – use a fixed income investment strategy as a way to preserve their capital over the long-term.
Assets, like bonds, have reliable payouts on a fixed schedule. So you can count on them to serve as an extra income source.
What Are the Differences Between Fixed Income and Equity Investing?
Equity (stock) and fixed income investing each have their respective risk-and-return profiles. Many investors will often choose an optimal mix of both strategies in order to achieve the desired risk-and-return combination for their portfolios. The classic portfolio is a 60/40 portfolio, with 60% allocated to stocks and 40% to bonds.
Equity investing offers higher returns than fixed income investing and appeals to people looking to grow their portfolio. However, higher returns are accompanied by higher risks. Risk takes shape in two forms: systematic and idiosyncratic risk.
Systematic risk refers to market volatility in various economic conditions. Systematic risk cannot be avoided through diversification.
Idiosyncratic risk refers to the risks that depend on the operations of an individual company. Idiosyncratic risk can be minimized through diversification of your portfolio.
Fixed-income investing typically has lower risks than equity investing and appeals to people looking to preserve their capital, while making income. Of course, like any investment, there are pros and cons to a fixed income strategy:
Pros to fixed income investing
- Capital preservation is all about ensuring you don’t lose the money you invest (known as the principal). In other words, if you invest $10,000 into a bond, you will still have $10,000 when the bond matures, plus interest.
- Fixed income investing provides a reliable additional source of income. With interest rates on these investments somewhat higher than the majority of standard savings accounts, you get more ‘bang for your buck.’
- With fixed income investing, there are less worries about all the many factors that may affect a stock. Just sit back and enjoy the arranged schedule of fixed income coming in.
Cons to fixed income investing
- Inflation Risk: if your bond pays 2% interest and the inflation rate is 3%, your money is losing purchasing power.
- Interest rates may rise. Bond prices do move in the opposite direction of interest rates because of the effect the new rates have on old bonds. So, if you are forced to sell your bonds before maturity, you could end up losing money because bonds with lower yields than current market rates are less attractive to investors.
- Default Risk. Individual bonds are always at risk of default, especially those from corporations. It can happen if the company faces financial problems and can’t repay its debts. That’s why bond funds, owning hundreds of different types of bonds, are a way to mitigate this risk.
Why Choose Fixed Income Investing
Fixed income investments are popular because they offer a certainty that investors don’t get with stocks. Investors know that they’ll receive regular interest payments at a set rate and over a set period of time while their capital is preserved.
By comparison, stock investors get no such guarantee of a pay-out but can make a higher rate of return which is why many investors saving for retirement create a 60/40 portfolio, consisting of 60% equities and 40% bonds. The strategy behind the 60/40 portfolio is to provide growth through equities while reducing volatility on the fixed income side.
How to Invest in Fixed Income
Individual investors can buy a single bond or other fixed income security. However, doing so does not offer diversification. Also, sometimes there are high minimum investment requirements, high transaction costs, and a lack of liquidity in the bond market make it tough to follow this path. Which is why it is recommended that fixed income investors use exchange traded funds (ETFs) and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access fixed income funds with low fees.
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with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the October 13, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.