COVID-19 shook up the capital markets to a point where investors were looking for alternative strategies to navigate the investing landscape moving forward. One of those strategies is factor-based investing, which saw its fair share of challenges like the rest of the markets, but some surprise performers have emerged like momentum.
“Amid growing concern over the spread of coronavirus, quants had seen unpredictable behavior in factor-based investment strategies during (late February’s) plunge in stock prices, in some cases canceling out diversification benefits,” wrote Risk.Net on March 5—per a Traders Magazine particle.
However, the global landscape is changing as the world acclimates to dealing with the pandemic. This, in turn, is starting to shift risk profiles with top line and benchmark risk coming to the forefront—a byproduct of the pandemic affecting revenue generation as lockdown measures are implemented globally.
“As the response to the coronavirus evolves, we are witnessing rapidly changing risk profiles across global markets,” said Melissa Brown, Managing Director and Head of Applied Research at Qontigo, during a webinar on March 25.
“We’ve seen a substantial jump in top line and benchmark risk. And it hasn’t just been a market risk, all of the components of our risk models saw an increase,” added Brown. “You can see that industry risk went up, stock-specific risk went up, and style risk went up.”
One specific factor that has been steadily outperforming the market is momentum. Looking at momentum via the S&P 500 Momentum Index, it’s made a nice bounce since the March sell-offs:
ETF investors looking to get into factor investing can look at a pair of funds that use a comprehensive factor approach that will provide them with broad exposure:
- Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS): seeks investment results that correspond generally to the performance of the Russell 1000 Comprehensive Factor Index. The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance of the underlying index, which is designed to track the equity market performance of companies in the United States selected on the investment style criteria of value, momentum, quality, low volatility, and size. It will invest at least 80% of its total assets (but typically far more) in component securities of the underlying index.
- Xtrackers FTSE Developed ex US Comprehensive Factor ETF (DEEF): seeks investment results that correspond generally to the performance of the FTSE Developed ex US Comprehensive Factor Index. The fund will normally invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of issuers from developed markets countries other than the United States. The index is designed to track the equity market performance of companies in developed countries selected on the investment style criteria of value, momentum, quality, low volatility, and size.
For more market trends, visit ETF Trends.