Multiple investment factors are off to solid starts in 2021, providing ballast for assets like the FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN).
However, advisors and investors considering factor-based strategies should remember that factors, just like individual stocks, go through ups and downs. QDYN is useful because it’s not dependent on a single factor – an appealing trait at this stage in the economic recovery.
“Our analysis suggests that the current economic recovery has prompted factors like value, size and dividend yield to outperform, which has been consistent with past historical recoveries,” according to FlexShares research.
With QDYN, Rates Matter Too
As 2021 plays out, it’s becoming evident that rising Treasury yields affect some factors more than others. QDYN’s solid year-to-date showing indicates it’s properly positioned for what could be a tricky factor environment due to rising interest rates.
“Our research suggests that the interest rate picture tells a very similar story: rising growth and inflation expectations that have buoyed the 10-year Treasury rate, which is also consistent historically with an economic recovery,” notes FlexShares. “With the US Federal Reserve (Fed) keeping short interest rates low, our research suggests that this ‘Bear Steepening’ of the yield curve, has historically been very good for factors like value and size.”
QDYN offers value and dividend factor exposure with a quality overlay. FlexShares’ quality dividend indexing methodology targets management efficiency or quantitative evaluation of a firm’s deployment of capital and its financing decisions. By using a management efficiency screen, the index can screen out firms that aggressively pursue capital expenditures and additional financing, which typically lose flexibility in both advantageous and challenging partitions of the market cycle.
That multi-factor approach could bear fruit because multiple factors can perform well in the recovery phase of the economic cycle, which is where the U.S. economy is today.
“Interestingly, we find that many factors perform favorably during recovery periods and we observed an asymmetry to returns if we take contraction and recovery together. In other words, we believe it is not surprising that a factor would do well in one of these two environments and not the other. However, the stronger excess return from one regime may tend to outweigh the weaker excess return from the other,” concludes FlexShares.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.