Factor Timing Was Again Difficult in 2018

By Todd Shriber via Iris.xyz

Factor timing, a historically tricky endeavor, remained that way in 2018. Early in the year, the growth and momentum factors solidified their leadership positions with small caps following suit.

Late in the third quarter, the growth, momentum and small size factors led equity markets lower. In the exchange traded funds (ETFs) space, the first domestic broad market funds to enter bear markets last year were small-cap ETFs. Theoretically, erosion in higher beta trades should have spurred interest in more defensive factors, such as low volatility and value, but as the chart below indicates, timing that move was not easy.

As has been widely documented across academic studies, investment cases and media reports, not only does factor leadership change from year-to-year, but some factors can under-perform for extended periods. A prime example of that is value’s laggard status relative to growth during the course of the most recent U.S. bull market.

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