Quality has replaced value as the factor driving US large-cap equities in 2017 so far, returning 19.1% between 1 January and 30 September 2017, according to new research from FTSE Russell and OppenheimerFunds.
Quality stocks have been the best performers in the Russell 1000 this year, returning 19.1%.
Analysis of the Russell 1000 Global Factor Index Series reveals that quality has been the best-performing factor among the members of the Russell 1000 Index thus far this year, outperforming five other factors including yield, size, low volatility, value and momentum. Momentum stocks are the second-best performers with 14.4%, while the benchmark Russell 1000 has returned 14.2% over this period.
In 2016, value-orientated stocks in the Russell 1000 returned 18.7%, the highest out of the six market factors. The election of President Trump near the end of 2016 provided a huge boost for value stocks, as investors became more bullish about potential tax cuts and infrastructure spending. YTD in 2017 however, value has dropped to fourth highest, returning just 11.3%.
The strong performance of quality stocks marks a turn-around for the factor, which ranked fifth in 2016 and returned just 10.7%. Only momentum fared worse during the year, up just 7.9%, while the Russell 1000 returned 12.1%.
David Mazza, head of ETF investment strategy at OppenheimerFunds, said: “Quality led the way in 2017 as investors sought out companies with high-quality balance sheets and earnings amid concerns regarding US equity market stability and uncertainty about the future direction of Fed policy and interest rates. However, as our analysis indicates, factor performance is often cyclical and it can be difficult to predict which individual factors will lead from one time period to the next.”
Rolf Agather, director of North American research, FTSE Russell, said: “Factor indices are an efficient, transparent and cost-effective way for investors to define and measure major market factors and, as the basis for ETFs, can be used as effective portfolio building blocks by factor investors.”
Interestingly, for those looking for signals of when the current bull market in US equities (already the second longest in history) might be running out of steam, the last time quality topped the list of best-performing factors was in 2007.