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Factor Investing Hits and Misses for Q2

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Factor investing has gained serious traction in last several years; in fact, it’s estimated that $1 trillion is invested in sector strategies and funds. And according to S&P Dow Jones, the second quarter showed some surprising hits and misses when looking at the factor indexes.

According to its latest index dashboard, S&P Dow Jones showed the top performing factor indexes — and those outperforming the S&P 500 benchmark — for the second quarter to be the S&P 500 High Dividend (5.35%), S&P 500 Momentum (5.29%), S&P Growth (5.25%), S&P 500 Low Volatility High Dividend (5.12%) and S&P 500 Pure Growth (4.71%).

Other factors, such as Equal Weight and Minimum Volatility were positive but behind the S&P 500, which was up 3.43% in the second quarter. The only S&P factor index that lost in the second quarter was the High Momentum Value, which was down 1.44%.

The report stated that “although faltering somewhat at the end of the quarter, momentum continued to outperform the U.S. large-caps.” Further, it states than since the start of 2017, the momentum index has outperformed the S&P 500 index by 15% in total return, “a figure that has rarely been exceeded historically and, when it has been exceeded, has tended to predict a subsequent period of weakness for the strategy.”

In the past 12 months, the S&P 500 Momentum Index has returned 26.36%, followed by Pure Growth and Growth at 22.80% and 20.63% returns respectively.

Another surprise, especially with the Fed tightening, was the top performance in the second quarter of for the High Dividend index (although over the past 12 months it has underperformed the S&P 500 index with an 11.11% return). The report stated it was even more surprising as the index is underweighted in stocks, technology, momentum and growth, adding that “despite the wider trends, high dividend-payers were still attracting investors.”

Much has been made in the media comparing the current market environment with the “tech bubble” of the early 2000s, the report states, and measuring the total weight of the largest five companies in the S&P 500, the “concentration in the U.S. benchmark has also risen to a level not seen since the tech bubble.” That said, the report points out there is a long way to go before the market reaches the “Nifty Fifty” concentration levels it did in the late 1960s and early 1970s.

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