In part 1 of this article, we had a look at how factors are cyclical. In part 2, we take a look at the common these in factors.
Ch-Ch-Ch-Ch-Changes
This was a year marked by some swift and sizable changes in factor leadership. There were some common themes among them. Each is a reminder of what I believe to be the core tenets of successful factor investing: discipline and diversification.
Exhibits 3, 4, and 5 are relative wealth charts. They plot the relative performance of the growth of an invest-ment in one fund versus another over time. When the line slopes upward, the fund in the numerator is outperforming the fund in the denominator. For example, in Exhibit 3, you’ll notice the line spikes upward beginning at the end of October 2016. During this span Vanguard Value ETF (VTV) outperformed Vanguard Growth ETF (VUG). When the line slopes downward, the opposite is true. And when the line is trending flat, the two funds are neck and neck. This allows us to readily identify trends in the relative performance of different factors.
