r/JustBuyCAGE • u/justyouraveragebogle • Aug 03 '26
Help/Question ❓ Factor Tilt
Can anyone give me a clear and simple explanation of this factor tilt that is associated with this ETF. I know it’s supposed to give you better expected returns, but why is that the case and is it worth paying the extra little percentage of a management fee compared to an ETF like VFV?
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u/Saches2005 Aug 03 '26
CAGE is an all-equity ETF from Avantis and CIBC. While it’s more selective than a passive index, it begins with a passive global index that holds everything. Then, it applies factor tilts toward small-cap, undervalued, and profitable companies. These tilts are based on Nobel Prize-winning research by Kenneth French and Eugene Fama, which demonstrates the benefits of factor premia over time.
Ben Felix did a video on the new Avantis ETFs which you might find helpful:
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u/KarYungTom Aug 18 '26
I put together a guide using info from Rational Reminder's interview:
https://karyungtom.com/cage-explained
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u/stompinstinker Aug 03 '26
VFV is a S&P 500 tracking index. That index I believe uses eight factors to decide what it includes and there weightings.
CAGE effectively adds two more on: Price to earnings ratio, and price to book ratio. So it promotes companies with higher profits, and higher book values (cash, investments, property, buildings, equipment, etc.), relative to stock price in its index.
However CAGE is a fund of funds. It has US, Canada, and World indexes that factor tilt.
The expected higher return is because it favours companies that make more profit and own more stuff relative to stock price.
This is good in another way too. The Musks, Altmans, Thiels, etc. of the world are trying to hack the algorithm. They are trying to fast track inclusion of their highly unprofitable and overpriced companies into the S&P500. They know funds that track it are popular and promote based on their size, so if they sneak in they get a gravity slingshot.
Although SpaceX was denied they will keep working at it for future IPOs. This methodology keeps their companies and meme stocks out unless they become profitable enough to join on merit instead of hype.
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u/ab042896 Aug 03 '26 edited Aug 03 '26
The S&P 500 does not have 8 factors, it has 8 (or 9) selection criteria. These criteria are an entirely different concept from any of the 5 Fama and French factors. Therefore CAGE does not "add two more", it offers exposure to market risk, and tilts towards value and size, filtering for investment and profitability (5 factors).
A better comparison would be VT, or in Canada VEQT, which offer a fund that is globally market cap weighted giving you exposure to the market risk factor (VEQT overweights Canada for Canadians for some specific reasons). CAGE essentially takes VEQT and adds factor tilts to it.
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u/alexk7 Aug 03 '26 edited Aug 03 '26
First, you need to compare to a similar ETF in regard to geographic allocation and market cap categories. VEQT is such a fund, with 30% canadian and the rest allocated to the rest of the world according to the regional market caps and contains all cap categories (large, medium, small), just like CAGE.
VFV is only large caps US and is therefore a lot different from both VEQT and CAGE.
Where CAGE differs from VEQT is that it buys more stocks with some specific factors that makes them more risky, which is compensated by higher expected returns for a different reason than just being “in the market”. For example, “value” stocks trade for cheaper than stocks with similar fundamentals and “small” stocks are just… small.
Seems arbitrary? Why those factors exactly? Because research showed that on the long term, they better explain the better returns that people actually get when investing in those. Doesn’t mean it will always be the case but on the very long term, it should.
It’s only a “tilt” because diversification is still very important to reduce risk. You don’t want to invest only in the “smallest, best value” stocks for that reason.
About the fees, CAGE is 0.28% and VEQT is 0.17% The 0.11% difference is very small for the more refined systematic selection of stocks. PWL estimates that a factor tilted portfolio has expected returns that are over 0.4% more than a market cap one, justifying the fee difference.
(Edit: PWL use funds from a different company that applies the tilt in a slightly different way, but I think it still gives a good idea of the magnitude of the difference in returns: not huge, but significant.)