Wednesday, July 29, 2015

Factor Return Dispersion

So far in 2015 we have seen much more dispersion in the return of different factors---low volatility, momentum, value, increasing dividends, etc.  As you can see from the chart below it didn't really matter what factor you chose in 2014, all of them did well, except for size (small cap).  This year has show much more dispersion, from momentum (MTUM ETF up 9%) to high beta (SPHB down 5.78%):

Factor ETF 2014 YTD 7/28/15
Value RPV 12.21% -3.17%
Momentum MTUM 14.62% 9.00%
Dividends NOBL 15.54% 0.81%
Quality QUAL 11.70% 4.41%
Low Vol USMV 16.33% 3.64%
High Beta SPHB 12.68% -5.78%
Size IJR 5.85% 1.68%
Standard Deviation of Returns 3.49% 4.91%

Source: Morningstar

We already have a factor rotation model in TUTT and will be expanding the universe and adding a bit of factor rotation to our Core Satellite Strategies to take advantage of this dispersion.  The Core Satellite Strategies will keep a fixed 60% allocation to factor/smart beta ETFs but now they will incorporate a rotation model that can take more advantage of dispersion among factors.

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