Low Volatility is the equity factor winner for 2018

In the fourth quarter, Dividend Yield was also a strong competitor

Nick KalivasTime to read: 5 min

The fourth quarter of 2018 was exceedingly tough for US equities, with no gains to be found in any of the indexes tracked by our quarterly factor scorecard. And yet, certain factors — namely Low Volatility and Dividend Yield — were able to significantly cushion the blow suffered by the broad market. While the S&P 500 Index lost 13.52% in the quarter, the S&P 500 Low Volatility Index fell just 5.22%, and the S&P 500 Low Volatility High Dividend Index fell just 6.77%.

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During market drops, the Low Volatility factor has outperformed

Lowering ‘down capture’ can help ease the impact of dramatic market swings

Nick KalivasTime to read: 2 min

In 2017, the S&P 500 Index did not experience any corrections greater than 5%. So far in 2018, there have been three such market drops. So which year represents the more typical investor experience? History shows us that the relative calm of 2017 was an outlier, and that losses and volatility are recurring events that investors should be prepared for.

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Three reasons to reconsider emerging markets

While EM has lagged overall in 2018, some EM factors did outperform

Nick KalivasTime to read: 5 min

The numbers don’t lie — emerging equity markets (EMs) have dramatically lagged US equities in 2018 as shown in the table below. The chaos in EM is best exemplified by the Brazilian elections, Russian sanctions, deleveraging in China, and the South African land redistribution policy. However, in some cases, factor-based approaches fared better than the overall market in EM, and I believe there are three indicators suggesting it may be time to reconsider this asset class.

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Growth and Momentum continue 2018 factor leadership

Q3 performance shows that different factors outperform in different market environments

Nick Kalivas

Time to read: 5 min

Factor returns displayed a wide dispersion in the third quarter, with a 12.2% spread between the best-performing factor index (Russell Midcap Pure Growth) and the worst-performing factor index (S&P 600 Pure Value). Year to date, the spread is a hefty 31.0%.1 What does this mean? Investors who judge the equity market based on traditional benchmarks may not realize the market opportunities that are present “underneath the hood” via factors.

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How equal weighting eliminates concentration risk

Facebook illustrates how a big company’s big loss can dominate traditional benchmarks

Nick KalivasTime to read: 2 min

There are 26 constituents in the S&P 500 Communication Services Select Sector Index, but only one was on the minds of investors in late July — Facebook. A disappointing earnings release on July 25 led to a 21.35% drop in the stock’s price over the next five days.1 Because of Facebook’s outsized presence in the index, that drop had a huge effect on overall returns. The index fell 7.02% over the same time frame — and 66.11% of that loss was due to Facebook. 1 Past performance isn’t a guarantee of future results, but whenever one stock has such an outsized influence on an index, that’s known as concentration risk. It’s a common risk that’s embedded into many indexes, but there are strategies built specifically to eliminate it.

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