Factor Investing Underperformance: Why High-Turnover ETFs Like JOET Lag and How to Fix It

The allure of factor investing has long captivated investors. Promises of outperforming the market by targeting “quality,” “momentum,” or other factors sound enticing. But when you dig into the numbers, the reality is far less glamorous. Take the Virtus Terranova U.S. Quality Momentum ETF (JOET), a high-turnover factor fund that has consistently trailed the S&P 500 despite its flashy strategy. This isn't just a blip—it's a systemic issue rooted in structural inefficiencies that investors must address.

The JOET Dilemma: High Turnover, Hidden Costs

JOET's portfolio turnover rate of 99% is a red flag. For context, the average Large Blend ETF has a turnover rate of 56%. This means nearly the entire portfolio is replaced annually, incurring brokerage fees, bid-ask spreads, and administrative costs. These expenses aren't captured in the fund's stated expense ratio, making them a hidden drag on returns.

From 2020 to 2024, JOET's annual returns (0.42% to 0.65%) paled in comparison to the S&P 500's (1.20% to 1.13%). While JOET's Sharpe and Sortino ratios suggest better risk-adjusted performance, investors care about absolute returns. Even a slight edge in risk management can't offset the drag of high turnover. In 2025, JOET briefly outperformed the S&P 500 (8.81% vs. 8.49%), but this was a narrow win in a year when the market was already rallying.

The tax implications are equally dire. High turnover generates short-term capital gains, which are taxed at higher rates. For taxable accounts, this erodes after-tax returns. By contrast, low-turnover index funds like the S&P 500 ETF (SPY) rarely rebalance, minimizing taxable events and preserving more of investors' hard-earned gains.

The Cost of Complexity: Why Factor Funds Fail to Deliver

JOET's strategy—combining quality and momentum factors—requires frequent rebalancing to chase the latest “hot” stocks. While this sounds dynamic, it's a recipe for disaster in a market where momentum can reverse overnight. The fund's quarterly rebalances and equal-weighting approach add layers of complexity, all of which come at a cost.

Moreover, the S&P 500's dominance isn't accidental. It's a concentrated, low-cost index that benefits from economies of scale. Factor funds, by contrast, often spread capital too thin across niche strategies, diluting returns. For example, JOET's focus on “quality” and “momentum” stocks may miss the next Apple or Microsoft, while the S&P 500 simply owns them.

Low-Turnover Alternatives: The Path to Long-Term Gains

The solution? Reallocate to low-turnover, cost-efficient alternatives that mirror the S&P 500's simplicity. Consider these options:

1. Vanguard Total Stock Market ETF (VTI):
2. Expense Ratio: 0.03%
3. Turnover Rate: <10%

4. 5-Year Annualized Return: 13.01% (2020–2025)
   VTI offers broad U.S. market exposure with minimal trading, making it a tax-efficient core holding.

5. iShares Core S&P 500 ETF (IVV):

6. Expense Ratio: 0.03%
7. Turnover Rate: <10%

8. 5-Year Annualized Return: 13.43%
   IVV is a near-perfect S&P 500 proxy, with ultra-low costs and liquidity.

9. BNY Mellon US Large Cap Core Equity ETF (BKLC):

10. Expense Ratio: 0.00%
11. Turnover Rate: <10%
12. Since Inception Return (2020–2025): 19.47%
    BKLC's zero-cost structure and focus on large-cap stocks make it a standout for budget-conscious investors.

These funds outperform JOET not by chasing factors but by sticking to a simple, proven formula: own the market. Their low turnover and expense ratios amplify compounding over time, a critical advantage for long-term investors.

Final Advice: Cut the Noise and Focus on the Basics

Factor investing is a seductive narrative, but it often masks structural inefficiencies. High-turnover ETFs like JOET may boast flashy strategies, but they're ultimately just expensive, tax-inefficient versions of the S&P 500. Investors would be better off cutting the noise and sticking to low-cost, low-turnover alternatives.

If you're already invested in JOET, consider trimming your position and reinvesting in funds like VTI or IVV. For new capital, skip the complexity and go straight to the market's beating heart. In the long run, simplicity and cost efficiency will always trump complexity and churn.

The market isn't a puzzle to solve—it's a game to endure. Play it smart.