Question 1

What is the Markowitz efficient frontier?

Accepted Answer

The Markowitz Efficient Frontier is a foundational concept in modern portfolio theory and a great starting point for investors thinking about diversification.

Developed by Harry Markowitz in 1952, the efficient frontier represents the set of "optimal portfolios" offering the highest expected return for a given level of risk, or the lowest risk for a given level of expected return, all with respect to a certain set of strict assumptions.

Here's how it looks. Imagine plotting the risk and expected return of all the available assets on a graph: expected return is on your vertical axis, risk (as represented by volatility) is on your horizontal axis. Next we can plot the risk and return of various portfolios that provide the best combinations of risk and expected return. These optimal portfolios form a curved line, which is the efficient frontier. According to the Markowitz framework, these are the portfolios you want to hold. Anything below that line would be considered inefficient.

The key insight here is that diversification really matters. By combining risky uncorrelated assets, investors can construct superior portfolios to any of the available assets in isolation.

It is important to note, however, that more recent research on multi-factor investing has demonstrated that the efficient frontier provides an incomplete view of the investment world.

Here's the limitation. The efficient frontier assumes all risk can be captured by a single dimension—volatility. Multi-factor research pioneered by Fama, French, and others has shown that multiple dimensions of risk drive expected returns. Factors like size, value, and profitability can explain differences in expected returns that the efficient frontier overlooks.

Despite its limitations, the efficient frontier remains valuable as a framework for thinking about diversification. Modern portfolio construction builds on Markowitz's foundation while incorporating factor exposures and realistic constraints. The core principle—that thoughtful diversification improves risk-adjusted returns—remains as relevant today as seventy years ago.

Question 2

What is a multifactor investment strategy?

Accepted Answer

A multifactor investment strategy systematically tilts a portfolio toward multiple dimensions of expected return. Peer-reviewed academic research has identified several factors—like value, size, profitability, and investment—that have historically commanded risk premiums. Rather than timing markets or picking individual stocks, multifactor strategies overweight securities with favorable factor characteristics and underweight those without them. The key insight is diversification across risk sources. Different factors perform differently across economic states. By combining exposures to multiple factors, investors can potentially earn higher expected returns while avoiding the concentration risk of betting on a single anomaly. It's a disciplined, rules-based approach grounded in decades of empirical evidence.

Question 3

Are Integrity strategies active or passive?

Accepted Answer

Integrity strategies are best described as systematically passive. While our portfolios are not strictly passive, they intentionally tilt away from market-cap weights toward securities with higher expected returns.

While we believe markets are highly competitive and do not attempt to outguess market prices, we do believe many investors can benefit from diversified risk factor exposure achieved through those tilts.

Our systematic approach has the flexibility to consistently target return premiums through time while seeking to avoid the costs and strategy drift that can result from the infrequent rebalancing typical of traditional index funds.

Question 4

How can we extract information from market prices?

Accepted Answer

Market prices, combined with fundamental company data like balance sheets and income statements, contain valuable information about expected returns.

In a multifactor framework, we examine cross-sectional differences in company characteristics. Securities with similar risk profiles should offer similar expected returns—so when we observe persistent return differences associated with factors like value, profitability, or investment, we are most likely identifying risk premiums.

We use quantitative methods to systematically tilt toward characteristics historically associated with higher average returns. Relative valuations and firm fundamentals guide which securities to overweight in portfolio construction.

Question 5

Who bears the transaction costs of assembling a basket of stocks for an ETF create basket?

Accepted Answer

When authorized participants create ETF shares, they typically deliver a basket of securities to the fund in exchange for newly issued ETF shares. The AP, not the fund’s existing shareholders, generally bears the costs of sourcing and delivering that basket, including underlying bid-ask spreads, market impact, financing, hedging, and any applicable creation fees. Those costs are then reflected in the economics of ETF trading. APs and market makers will not create or redeem shares unless the expected arbitrage opportunity compensates them for those frictions. As a result, creation/redemption costs help determine the ETF’s arbitrage band and may be reflected in premiums or discounts to NAV and in the bid-ask spread quoted on exchange. So when investors buy or sell ETF shares in the secondary market, they often pay these trading frictions indirectly through the ETF’s bid-ask spread or execution price. This structure helps protect long-term shareholders from the dilution that can occur in mutual funds, where shareholder flows may force the fund itself to buy or sell securities.

Question 6

What are some examples of explicit transaction costs that are incurred inside an ETF?

Accepted Answer

Beyond the expense ratio, ETFs incur real trading costs. These include brokerage commissions when buying or selling securities, bid-ask spreads paid on every trade, exchange fees, and regulatory transaction fees. For funds that rebalance frequently or hold less liquid securities, these costs add up. While they don't appear in the expense ratio, they directly reduce fund returns. Smart investors look beyond the published fee to understand the total cost of implementation.

Question 7

"Given the create/redeem process, do ETFs have transaction costs and why?"

Accepted Answer

Absolutely. While the create-redeem process handles much of the fund's flow in-kind, ETFs still trade securities regularly. They rebalance portfolios, reinvest dividends, manage cash flows, and adjust holdings when index methodologies change. Each trade incurs bid-ask spreads, commissions, and market impact costs. The in-kind mechanism reduces transaction costs significantly compared to mutual funds, but it doesn't eliminate them. Every portfolio change still comes with a price tag that impacts returns.

Question 8

How are the USCCB guidelines different from Mensuram Bonam?

Accepted Answer

The USCCB Socially Responsible Investment Guidelines and Mensuram Bonam, published by the Vatican's Pontifical Academy of Social Sciences, both provide recommendations for Catholic institutions on aligning investments with faith and morals. Each has its own organizational structure outlining guiding principles and categories, with varying degrees of prescriptive detail on specific issues and policies. There's tremendous overlap between the two documents, especially at the thematic level. Both emphasize protecting human life and dignity—avoiding involvement in abortion, embryonic stem cell research, and environmental destruction. Where they differ is typically in specificity. One document may address topics like in-vitro fertilization, media glorification of violence, or genetic engineering in greater detail than the other. The USCCB guidelines have existed in some form since 1991, with several revisions and the most recent update in 2021. Mensuram Bonam was published in 2022. Some commentators view the Vatican document as an effort to create a more global conversation around incorporating Catholic Social Teaching into the investment world.

Question 9

Are active strategies always more expensive than passive strategies to implement?

Accepted Answer

Not in fees alone, but active strategies typically involve higher turnover, generating both trading expenses and taxable gains. Market-cap weighted passive strategies naturally rebalance as stock prices move—no buying or selling required. This means lower transaction costs and fewer capital gains distributions. When you factor in the total cost of ownership, passive strategies often maintain a significant advantage beyond just the expense ratio.

Question 10

Are all index funds passive?

Accepted Answer

Not all index funds are passive. The definition of index funds has evolved over time. While they used to be broadly diversified and market-cap weighted, today many funds labeled as “index” actually hold concentrated portfolios that stray significantly from the market. So it’s important to look closely at what an index fund really holds.

Question 11

What is the profitability factor?

Accepted Answer

The profitability factor, or RMW—Robust Minus Weak—looks at the difference in returns between highly profitable companies and those with weaker profits. It’s set up as a long-short portfolio, going long the strong and short the weak.

At Integrity, we tilt toward companies with solid profitability, aiming to capture higher long-term expected returns for our clients.

Question 12

What is the value factor?

Accepted Answer

The value factor, or HML—High Minus Low—shows the historical return premium of value stocks over growth stocks.

The factor is built as a long-short portfolio: long high book-to-market companies, short low book-to-market companies.

At Integrity, we tilt portfolios toward value characteristics to capture higher long-term expected returns.

Question 13

What is the size factor?

Accepted Answer

The size factor, or SMB—Small Minus Big—captures the historical tendency of small-cap stocks to outperform large-cap stocks. It’s built as a long-short portfolio, going long small companies and short large ones. At Integrity, we tilt portfolios toward smaller firms to harness this size premium to improve overall portfolio long-term expected returns.

Question 14

What is a factor?

Accepted Answer

At Integrity, we define a factor as the return stream created by a long-short portfolio formed on a sorting characteristics like size, value, or profitability.

These long-short factor returns help us understand how certain traits have historically contributed to performance. We use this framework to tilt our portfolios toward characteristics that have been linked with higher long-term expected returns.

Question 15

What is evidence-based investing?

Accepted Answer

Evidence-based investing relies on peer-reviewed research, not speculation or market timing. It targets long-term drivers of return—like market, size, value, and profitability factors. At Integrity, we combine this with Catholic screens and corporate engagement, using factor exposures to maintain diversification and expected returns—helping clients stay aligned with both their faith and financial goals.

Question 16

What is an expected return?

Accepted Answer

Expected return is the probability-weighted average of all potential investment outcomes—in other words, the average return an asset may deliver over time. At Integrity, we draw on the information embedded in market prices by tilting toward proven factors like size, value, and profitability. This helps us systematically target higher expected returns while staying aligned with Christian moral values.

Question 17

What is screening?

Accepted Answer

Screening is the process of filtering and selecting investments within a portfolio based on specific criteria—generally criteria that seek to align a portfolio with non-financial priorities and ethical principles. In ethical or faith-based investing, screening often means excluding companies involved in activities that contradict one's moral convictions.

For the Christian investor, this typically means avoiding companies that profit from grave evils such as abortion, pornography, embryonic stem cell research, and other practices that contradict or violate human dignity.

So far, this largely describes what is known as negative screening, the exclusion of problematic companies. There is also positive screening, which is the use of ethical criteria to select specific companies for inclusion in a portfolio.

At Integrity, we primarily use screening to help investors avoid materially cooperating with grave evils, while maintaining well-constructed, diversified investment portfolios.

Question 18

What are the benefits of investing in a transparent strategy?

Accepted Answer

Transparency in investment strategies provides several key benefits. First, you know exactly what you own. You can see the holdings, understand the investment process, and verify that the strategy aligns with your values and objectives. Second, transparency makes it much easier to evaluate whether managers are actually doing their job. You can assess if they're following their stated methodology, maintaining appropriate factor exposures, and executing the strategy as promised. Without transparency, you're simply trusting claims without evidence. Third, transparent strategies tend to be more cost-effective. When the methodology is clear and rules-based, fees are typically lower than opaque strategies that justify high costs with supposed proprietary insights. Finally, transparency helps you construct a better overall portfolio. Understanding how your investments work allows you to avoid unintended concentrations and make more informed allocation decisions.

Question 19

How did Markowitz define risk?

Accepted Answer

Markowitz defined risk as the volatility of returns—specifically measured by variance or standard deviation. In simple terms, a riskier investment is one whose returns bounce around more unpredictably. If two investments have the same expected return, the one with lower volatility is considered less risky in the Markowitz framework. But here's where it gets interesting. Markowitz's key insight was recognizing that portfolio risk isn't just the sum of individual asset risks. It depends critically on how assets move relative to each other—their correlations or covariances. By combining assets that don't move in lockstep, investors can reduce overall portfolio volatility below what you'd expect from simply averaging individual risks. This covariance insight was revolutionary. It provided the mathematical foundation for why diversification works—not just holding many things, but holding the right combination of things that behave differently under various market conditions.

Question 20

"What does it mean that ""markets work""?"

Accepted Answer

When we say markets work, we mean they are fair—not omniscient. Market efficiency means that available information is rapidly incorporated into prices through competition among investors. You ca cannot systematically exploit publicly known information for excess returns because others have already acted on it.

But fair doesn't mean perfect. Markets do not predict the future or always get valuations right. We expect errors in market valuations to be symmetrical—sometimes prices are too high, sometimes too low, but in unpredictable ways. You can't consistently identify and exploit these mispricings because they are random.

The key insight: beating the market through stock picking or market timing is extraordinarily difficult—not because markets are clairvoyant, but because they're competitive and efficient at processing available information.

Question 21

How much diversification is enough?

Accepted Answer

When modern portfolio theory first emerged, early research suggested that holding 20 to 30 stocks was enough diversification to achieve total volatility similar to the market. But later studies showed that even if expected volatility is similar, small differences can compound over time, creating significant realized tracking error. More recent research recommends holding at least 250 stocks to stay close to a market index. At Integrity, we view the market as just one premium among many an investor might want to capture. Depending on the strategy, we typically recommend portfolios with hundreds or even thousands of stocks to balance diversification, risk, and return potential.

Question 22

Why are ETFs tax efficient?

Accepted Answer

ETFs gain their tax advantage primarily through the creation-redemption process. When investors buy or sell ETF shares, authorized participants exchange baskets of securities directly with the fund—transferring shares in-kind rather than selling them. This avoids triggering capital gains inside the fund, and so it becomes very unlikely that an ETF will distribute capital gains to ETF shareholders.

Now, ETFs still distribute ordinary income from dividends and interest, just like mutual funds. But they rarely pass through capital gains.

There's also a lesser-known strategy becoming more popular in recent years: seeding an ETF through a 351 exchange.

In a 351 exchange, investors can contribute appreciated securities at fund launch in a tax-deferred manner. This creates opportunities for tax-efficient diversification or adjustments to exposures.

Question 23

What is quantitative investing?

Accepted Answer

Quantitative investing means we build portfolios with data and rules, not forecasts and not gut instinct.

We take academic research, like the Fama-French Five-Factor Model, and use it to systematically target the things that actually drive returns, while keeping you diversified and managing risk.

At Integrity, we pair that discipline with our ethical values, giving advisors a scalable, evidence-based process they can use with confidence, and a clear conscience.

Question 24

What is Integrity Quantitative Advisors?

Accepted Answer

Integrity Quantitative Advisors is an asset manager built on one idea: be excellent at investing, and never make our clients compromise to get it. Everything we build is grounded in peer-reviewed research and tested the hard way, with real evidence. We design solutions for financial advisors that are priced fairly and held to a high academic, fiduciary, and moral standard. Our faith and integrity shows up not only in what we screen out but also in how we serve you, so that advisors can pursue their clients' goals with a clear conscience.

Question 25

What is the difference between active and passive investing?

Accepted Answer

In the investment world, there’s debate over what’s “active” versus “passive.” At Integrity, we see these terms as insufficient.

Investors used to align with either a market cap weighted index strategy because they believed all information is already priced or a concentrated active strategy that seeks to profit on unpriced information.

We now know that there can be good reasons to deviate from the market portfolio besides information arbitrage, like gaining exposure to new uncorrelated risk premium (which would not require taking on the costs and risks of information arbitrage).

Question 26

How is ESG different from Ethical Investing?

Accepted Answer

Ethical investing goes by a lot of names. Faith-based investing, biblically responsible investing, morally responsible investing, and sometimes it gets grouped with ESG. The tools do overlap. Both approaches screen companies, vote proxies, engage management, but the difference is the framework behind the tools. ESG evaluates companies against environmental, social, and governance criteria, and those criteria shift as priorities shift. Our framework comes from a longer, deeper moral tradition. We ask a specific set of questions. Is a company involved in a serious moral harm? How grave is it? Is the involvement direct or remote? And given that, does ownership require divestment or perhaps permanent engagement? This is the classical framework of cooperation with evil, and we at Integrity apply it to our portfolios. Sometimes this lands us right where ESG lands, but the reasoning is what's different, and it's why advisors can use our strategies with a clear conscience.

Question 27

How is an ETF different from a mutual fund?

Accepted Answer

While both ETFs and mutual funds pool investor money into diversified portfolios and are both regulated by the 1940 Act, they work quite differently. Think of an ETF as a special type of mutual fund.

ETFs trade on exchanges throughout the day at prices determined by intraday supply and demand, while mutual funds transact once daily for all buyers and sellers at a single price called the net asset value, or NAV. The NAV is calculated by the fund accountant after market close by valuing all the underlying securities in the fund.

One of the biggest differences is tax efficiency. ETFs use an in-kind creation and redemption process to handle flows, which typically avoids triggering capital gains distributions to ETF shareholders. Open-ended mutual funds, on the other hand, typically manage flows using cash and on-market trading, which often distributes taxable gains to shareholders each year—even if the shareholder didn't sell a single share. This structural advantage makes ETFs particularly attractive for long-term taxable investors.

Question 28

What is an ETF?

Accepted Answer

An ETF, or exchange-traded fund, is an investment vehicle that holds a basket of securities—like stocks or bonds—and trades on an exchange throughout the day, just like a stock. Unlike mutual funds, which price once at the end of each trading day, ETFs offer real-time pricing and flexibility.

The first ETF was launched in 1993 by State Street Global Advisors—the SPDR S&P 500 ETF. For decades, launching a new ETF required exemptive relief from the SEC—essentially a waiver allowing the fund to operate in ways that technically violated provisions of the Investment Company Act of 1940. ETFs didn't fit neatly into regulations designed for mutual funds, so each sponsor had to individually petition the SEC.

In 2019, the SEC's new ETF Rule eliminated the need for individual exemptive relief by creating a standardized regulatory framework specifically for ETFs. This streamlined approval and opened the door for more active management, customized approaches, and specialized portfolios—transforming ETFs into versatile tools for modern investors.

Question 29

How does Integrity implement faith-based quantitative investing?

Accepted Answer

At Integrity, faith-based investing is fully integrated into portfolio construction. We use factor models to rank companies on characteristics that indicate differences in expected return.

This framework then allows us to reallocate screened-out weight into the most attractive opportunities, so we can keep portfolios diversified and risk under control.

Question 30

What is systematic investing?

Accepted Answer

Systematic investing means we follow consistent, rules-based processes to build portfolios, so emotion and guesswork stay out of it. It's grounded in academic research, using models to pick and weight what goes in.

At Integrity, we apply the Fama-French framework, tilting toward value, size, and profitability, and we layer in our values-based screens. For advisors, that's a disciplined, transparent strategy that scales easily across every client portfolio.

Question 31

What is faith-based investing?

Accepted Answer

Faith-based investing applies religious values—like Catholic moral teaching—to investment decisions. At Integrity, we avoid companies involved in activities contrary to Church teaching, and we focus on stewardship, human dignity, and the common good. This approach helps financial advisors align their clients’ portfolios with their deeply held beliefs.

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