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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‘Technology companies’ can’t be contained by just one sector

GICS launches a new sector to reflect the realities of the modern economy

Time to read: 2 min

As I’ve written in this blog before, trying to define the technology sector has become more difficult over the past decade. Technology utilization throughout the economy is ubiquitous, making it difficult to imagine any company, regardless of its sector, outperforming its peers without effectively implementing technology. As a reaction to the diverging drivers of many companies in today’s economy, the Global Industry Classification Standard (GICS) has implemented major changes to reclassify the official sector designation for many stocks. So what does this mean for investors?

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Are investors over-indexed?

Invesco research reveals a disconnect between market expectations and portfolio allocations in market-cap-weighted funds

Time to read: 3 min

Market-cap-weighted strategies have dominated the investment landscape when it comes to exchange-traded funds (ETFs). Is it the low cost and simplicity of these funds that are appealing, or do investors dangerously believe that market-cap-weighted funds are lower risk than other mutual funds and ETFs?

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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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Worried about emerging markets? Consider the low volatility factor.

History shows that when EM stocks sell off, US low vol stocks generally outperform

Nick KalivasTime to read: 2 min

Emerging markets (EM) have been turbulent throughout 2018 due to US-China trade tensions, the deleveraging of the Chinese economy, Brazilian political uncertainty, Middle Eastern conflict and Russian sanctions. The recent plunge in the Turkish lira has only added to investors’ jitters. As EM stocks fall, many investors may be looking to US stocks as a hedge against risk. Based on past periods of EM turbulence, I believe US low volatility stocks in particular warrant a closer look.

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The Q2 factor winner? Small cap.

As global risks grow, factor diversification may help investors stay prepared

Nick KalivasTime to read: 4 min

With fears of a trade war looming over global large-cap stocks, the small-cap factor emerged as the clear winner of the second quarter. Specifically, small-cap low volatility/high dividend was the best-performing factor, followed by the small-cap versions of value, growth, equal weight and momentum (see the chart below for the indexes that represent these factors).

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