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2016 Shows That Factors Are Fickle (Part 1)

Factors are Cyclical

Ben Johnson 20.01.2017

In the past year, I’ve explored a variety of topics related to strategic-beta exchange-traded products, factors, “smart” beta—whatever you’d like to call it. My goal in doing so has been to educate all of you. I hope that the information and insights I’ve shared will help you to make better decisions when it comes to using this ilk of funds in your portfolios, or has otherwise led you to conclude that they simply are not your cup of tea.

In this article, I am going to revisit the topic of factors’ cyclicality. The year was marked by some dramatic changes in factor leadership. Value made a comeback, while growth lagged. Small-cap stocks had been steadily gaining ground on large caps through much of the year and spiked higher in the weeks following the U.S. election. Low-volatility stocks, which had been outperforming the market at large as well as more-volatile names, are now getting left in high-beta stocks’ dust.

To be clear, this sort of reshuffling is a regular feature of not just factors, but sectors, asset classes—you name it. The lessons to be learned from these perpetual games of leapfrog are essential. Implementing those lessons is hard.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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