Smart beta exchange traded fund investors are able to hone in on specific market factors to capitalize on trends in the market.
“For investors expecting that current market trends may continue, quality and momentum offer that exposure,” David Mazza, Head of Beta Solutions Investment Marketing and ETF Specialists, said in a note. “For those anticipating a return to fundamentals, however, a rotation to value and size may be in order.”
The ongoing reflation trade favored the value factor. Many previously anticipated that with President Donald Trump in office, the new administration would enact pro-growth policies that would fuel inflation. The value factor performs best in periods of economic recovery.
However, since January, the post-election reflation trade stalled and quality and momentum took the front seat. Historically, quality stocks perform best in economic contractions, but expectations for a recession remain low.
After the recent rally, quality is now the most expensive of all four valuation multiples while value is the least expensive. Potential investors, though, should keep in mind that value has the second lowest expected earnings-per-share growth rate among the major factors, the highest debt-to-equity ratio and lowest return on equity. Meanwhile, momentum has the highest expected earnings growth.