The Advisors Guide to Pairing Invesco’s Factor-Based Strategies

Advisors can pair factor-based strategies to optimize a client portfolio.

Many factor-based strategies have significantly outperformed the S&P 500 this year, with the small-size factor being one of the lead drivers of outperformance.

The Invesco S&P 500® Equal Weight ETF (RSP)’s tilt toward the small size and value factors is a strong complement to the Invesco S&P 500 Momentum ETF (SPMO) and the Invesco S&P 500 Low Volatility ETF (SPLV) in the current environment.

RSP is a favored strategy for investors looking to diversify their portfolios and reduce concentration risk. RSP tracks the S&P 500 EWI, which is designed to be a size-neutral version of the S&P 500. It includes the same constituents as the cap-weighted S&P 500, but each company in the S&P 500 EWI is allocated the same weight at each quarterly rebalance. By weighting each constituent company equally, a small group of companies does not have an outsized impact on the index.

Nick Kalivas, head of factor and core equity product strategy, ETFs, and indexed strategies at Invesco, told VettaFi that the low volatility factor – SPLV – works well with RSP. Historically, the excess return correlations between the size and value factors and low volatility have been kind of low or negative. The strategies tend to have higher standard deviations of return, creating a balance and making RSP and SPLV ideal complements for one another.

The other way to look at it would be to pair RSP with the momentum factor, or SPMO. Due to its equal-weight methodology, RSP tilts toward anti-momentum. Every quarter, the fund rebalances itself, selling relative winners and buying relative losers, bringing everything back to equal weights.

Momentum, on the other hand, is the exact opposite – it latches on to what is doing well. Historically, the excess return correlation between momentum and value has tended to be negative, according to Kalivas.

For more news, information, and strategy, visit the Portfolio Strategies Channel.