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Quarterly factor commentary

Factor ETF performance update

A positive earnings season in both the U.S. and Europe and signs of stable global growth fueled a momentum-driven growth rally as the growth category reigned over value in the quarter.

Insights on which factors may
have the potential to outperform

Holly Framsted, Smart Beta Product Strategist, looks at the prospects for Value and Momentum moving forward.

  • View transcript

    Hi, I’m Holly Framsted, Smart-Beta Product Strategist here to update you on market performance in the second quarter, and the prospects for Value and Momentum moving forward.

    Markets in the second quarter largely shrugged off political drama and uncertainty - including a surprising hung parliament in the UK, a lack of meaningful progress on key regulatory reforms in the U.S., and continued headlines surrounding President Trump. Global markets reached new highs on the back of a positive earnings season in both the U.S. and Europe and signs of stable global growth. Furthermore, volatility remained at multi-year lows.

    In this environment, the growth style category has reigned over value, and momentum has been fueling the growth rally. According to BlackRock research, on average, momentum has historically fueled returns for growth managers, and against the current backdrop, it is no surprise that the MSCI USA Momentum Factor ETF (MTUM), has been a formidable growth category fund. The ETF was a top-performer in the quarter, outperforming the category average fund return as well as the category benchmark.

    The counterbalance to growth, is value, a style tilt which tends to do well during sharp, cyclical economic expansions. While the pace of growth has been steady, it has been slower than previously anticipated, and in this environment where momentum thrives, value can tend to lag. The MSCI USA Value Factor ETF (VLUE), which represents cyclical, deep value exposure suffered in the quarter, underperforming the value style category on average, but performing in line with the category benchmark as more defensive dividend exposures outperformed.

    Looking forward, the factor tango between value and momentum fueled growth is likely to continue, but may be more in sync than investors generally expect. According to the BlackRock Investment Institute’s Mid-year outlook, today’s economic regime favors risk-seeking style factors over defensive ones. The momentum factor — securities with strong recent price gains — has outperformed in economic expansions, and today’s low-volatility environment coupled with a sustained economic expansion may bode well for momentum.

    At the same time, the Institute believes that structurally lower growth and interest rates mean that comparing valuation metrics to past levels may not be a good guide to the future. Low volatility is seen as a normal feature of the benign economic and financial backdrop — and not as a warning sign in itself. The combination of lower growth rates and volatility, when taken together, could mean equities are cheaper than they look. This backdrop also offers the potential for deeper value tilts (like VLUE), rather than more defensive dividend plays in the value category, to outperform in the long run.

    Thank you for your interest in the iShares Edge Factor ETFs.

Performance overview

Get details on Q2 performance for iShares Smart Beta ETFs.


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iShares Edge Factor ETFs highlights

Markets largely shrugged off political drama and uncertainty in Q2, reaching new highs on the back of a positive earnings season and signs of stable global growth, while volatility remained at multi-year lows. Investors stayed the course with trending companies (particularly in the Information Technology sector) and more stable companies with strong balance sheets for most of the quarter. Momentum was a significant positive contributor to performance in international and emerging markets.

iShares Edge Minimum Volatility ETFs highlights

USMV continued to be resilient in 2017, despite U.S. equities continuing to climb the “Wall of Worry” and the VIX hitting multi-year lows. Outside the U.S., stocks continued to rally on improving global growth, and emerging markets equities were boosted by economic reforms and improving corporate fundamentals. While performance compared to broad markets varied, all exposures continued to deliver their target of lower overall risk in this environment.