It’s been a great year for stocks and an even better year for factor investors. The caveat, of course, is if you’ve been bullish on the correct investing factors. Who are this year’s biggest winners and losers in the factor ETF marketplace?
The factor investing universe, which includes both ETFs and mutual funds, has approximately $2 trillion in assets under management. This figure is projected to expand to $3.4 trillion by 2022, according to research estimates from eVestment and Preqin.
Factor investing, sometimes referred to as “smart beta,” involves targeting specific drivers of return across asset classes. The two main factor classifications are macroeconomic and style. And within the equity market, factor groupings can be further sub-divided into single-factor, multifactor and volatility minimization strategies.
Quality Is King
Sitting atop this year’s elite performers is the iShares Edge MSCI USA Quality Factor ETF (QUAL). This fund has climbed 28.8%, beating the Schwab U.S. Broad Market ETF (SCHB) by 263 basis points year to date. QUAL has also outperformed peer factors like momentum and value.
QUAL contains 125 U.S. large- and mid-cap stocks that are screened for quality yardsticks such as return on equity, earnings variability and debt to equity. QUAL’s industry sector weighting tilts heavy toward technology stocks, which account for almost 25% of the fund’s equity exposure. Healthcare (13.6%), financials (12.4%) and communication services (10.4%) are the next largest sector weightings. The fund’s top three holdings are Apple, Johnson & Johnson and Mastercard.
Low Vol, Big Gains
Funds that attempt to reduce stock market volatility have also done well this year. One example is the Invesco S&P 500 Low Volatility ETF (SPLV), which is up 25.7%. SPLV chooses 100 stocks within the S&P 500 with the lowest realized volatility during the past 12 months. Top industry sectors by weight are utilities (28%), real estate (21.6%) and financials (16.9%). The fund, which has $12.5 billion in assets, shuffles and rebalances stock holdings every quarter. While SPLV has slightly lagged the SPDR S&P 500 ETF (SPY) by roughly one percentage point this year, it has still managed to outpace factor peers like momentum and value.
International Factors
Factor investing isn’t limited to U.S. markets. Which international markets have delivered the best gains? The iShares Edge MSCI Intl Quality Factor ETF (IQLT) has gained 23% since the start of the year. IQLT has outdistanced all single-factor peers along with even plain-vanilla peers like the Vanguard FTSE Developed Markets ETF (VEA). IQLT screens stocks within its developed markets mandate using quality measures such as return on equity, earnings variability and debt to equity. The fund holds 301 stocks with Roche Holdings, Nestle and AIA Group the top three positions.
After quality, the next best performing factor in international equities is momentum.
The Invesco S&P International Developed Momentum ETF (IDMO) has climbed 20.5% year to date. While IDMO invests across large-, mid- and small-cap international stocks, the bulk of its market exposure is concentrated in large-cap growth (49.2%) and large-cap blend (30.4%). The fund excludes securities from the U.S. and South Korea. IDMO’s portfolio contains 221 stocks.
Summary
While it’s premature to speculate which factor will ultimately be 2019’s top performer, it’s late enough in the year to make an educated guess at which factor ETFs will be among the winners. And the funds we just covered are a good bet to secure that honor.
Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of “Habits Of The Investing Greats.”