Quarterly factor commentary

Factor ETF performance update

Most of Q1 continued the risk-on trends seen late last year: stock indexes surged to new highs, the U.S. Fed raised rates for the third time since the Financial Crisis, and the S&P Volatility Index (the “VIX”, a measure of implied equity volatility) fell to multi-year lows.

iShares Edge Minimum Volatility ETFs highlights

Despite record low levels in the VIX, the retreat of the Trump Trade, in combination with a more dovish stance on rate increases from the Fed, boosted defensive sectors and benefited minimum volatility exposure domestically. In international markets where the risk-on rally was more prominent, minimum volatility lagged the broader market. All exposures continued to deliver their target of lower overall risk in this environment.

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iShares Edge Factor ETFs highlights

Domestically, investors moved away from bets on infrastructure and financials, traditionally more value-oriented sectors, in favor of growth-oriented, trending companies (Momentum) which have benefited from broader global economic growth and decreased fears of protectionist trade policies under President Trump. Value was in favor in international developed markets amid stronger global growth and a pick-up in sentiment.

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Insights on factor performance

Holly Framsted, Smart Beta Product Strategist, provides an update on first quarter factor performance.

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    For most of Q1, we continued the risk-on trends seen in late last year:

    • stock indexes surged to new highs
    • the U.S. Fed raised rates for the third time since the Financial Crisis
    • the VIX (a measure of implied equity volatility) fell to multi-year lows
    • consumer confidence rose to a 16-year high*, and
    • high yield debt rallied.

    However, in recent weeks we have seen a divergence in factor performance between U.S. and non-U.S. markets due to a reversal of the Trump trade. Doubts mounted about the President’s ability to pass sweeping protectionist policies and tax reform, which many feared could stunt global growth while concurrently spurring domestic growth. 

    In the U.S., the unwind of the Trump trade led Value to be the worst-performing factor as these stocks, which tend to rally in strong economic upswings, suffered from the pullback in domestic growth expectations that had been priced into the market.  Momentum had a strong quarter domestically, benefitting from the investor shift away from value and towards stocks which favor more global growth trends. 

    The opposite was true outside of the U.S. In non-U.S. markets, the value factor actually benefited from an increase in global growth and reflation, while the momentum factor lagged amid the shift in global sentiment. 

    In this shifting environment, the quality and size factors contributed minimally to performance in the quarter both in the U.S. and in non-U.S. markets. 

    How did minimum volatility fare? Despite record low levels of volatility, the retreat of the Trump Trade, in combination with a more dovish stance on rate increases from the Fed, boosted defensive sectors and benefited minimum volatility exposure domestically.  In international markets where the risk-on rally was more prominent, minimum volatility lagged the broader market.  All exposures continued to deliver their target of lower overall risk in this environment. 

    Thank you for your interest in Factor Investing, and iShares Edge Factor ETFs. 

     

    *Source: Bloomberg. Conference Board Consumer Confidence Index rose to 125.6, highest since December 2000.

     

    Spoken Disclosure:

    Visit www.iShares.com or www.BlackRock.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.

    Written Disclosure:

    Certain sectors and markets perform exceptionally well based on current market conditions and iShares Funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.

    Index returns are for illustrative purposes only.  Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times.

    International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

    There can be no assurance that performance will be enhanced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses. The iShares Minimum Volatility ETFs may experience more than minimum volatility as there is no guarantee that the underlying index's strategy of seeking to lower volatility will be successful.

    The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

    The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

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