Tracking The Smart Beta Horse Race With ETFs

How’s that factor strategy been working for ’ya lately? That’s a topical question for a growing number of investors as “smart beta” products play a bigger role in portfolio design. You may not be drinking the factor Kool-Aid, but it’s still worthwhile to check in on these risk premia periodically for some context on what’s driving equity performance generally. With that in mind, let’s review a set of eight ETFs that represent the usual suspects in the US equity factor space.

The first step is looking at factor returns for the past 30 trading days through yesterday (Mar. 23). Leading the field by a hair is the so-called quality factor, which targets companies with relatively strong fundamentals, such as high return on equity and low financial leverage. The iShares Edge MSCI USA Quality Factor (QUAL) is ahead by 4.0% over the trailing 30-day window, or just slightly ahead of the return for iShares Edge MSCI Minimum Volatility USA (USMV).

In last place for the past 30 days is the small-cap value factor via iShares S&P Small-Cap 600 Value (IJS), which is off 1.0%. The ETF’s close on Thursday left it close to the lowest level so far this year.

For perspective in our factor-performance travels, we’ll use everyone’s favorite yardstick of the US market as a benchmark. The S&P 500, based on SPDR S&P 500 (SPY), has delivered a middling gain of 2.5% vs. the factor ETFs over the past 30 trading days.

For the trailing 1-year window, small-cap core is in the lead. iShares Core S&P Small-Cap (IJR) is up a strong 26.0% over the past 12 months, or roughly 50 basis points better than the number-two performer: iShares S&P Small-Cap 600 Value (IJS).

At the back of the field is the low-volatility factor. iShares Edge MSCI Minimum Volatility USA (USMV) is ahead by 12.7%, the softest gain for the factor ETFs in the one-year total-return column.

Meanwhile, the S&P 500’s performance is more or less in the middle for the one-year results, based on SPY’s 17.5% total return for the past 12 months.

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