QMIT by QuantZ presents the Weekly Smart Beta Book - Explosive factor moves in Aug MTD of up to +14%
It's 9:30am - do you know where your factor risks are?
You can count on QuantZ for game changing factor investing insights based on our ESBs (Enhanced Smart Betas). Here’s our latest commentary:
The US factor investing landscape was fairly moribund YTD in 2019 up until Aug with a huge downdraft in Value alongside a nice rally in Momentum. This was largely due to the 1-way market melt up YTD which resulted in most factors being stymied by the short side while the Longs held up reasonably well. All of that changed in the 1st couple of weeks of Aug alone due to explosive factor moves accompanying the resurgence of market vol (coincident with negative macro, trade & geopolitical data).
The Risk Off trade in Aug has (for obvious reasons) been a blessing for our Risk ESB (aka Low Vol) which is up +14% MTD alone because the Low Vol longs held up flattish while the higher vol shorts got hammered (-14.17%).
The Risk Off trade in Aug has (for similar reasons) been a huge boon for our PMOM & EnMOM ESBs which are up +12.6% & +9.5% MTD driven entirely by the shorts which continued their downward trajectory at -14% & -10% MTD. This brings them to the top of the YTD charts at +18.82% & +12.18% respectively & substantially higher than their LTD ~20y mean.
While ART & Stability bring up the rear in terms of LTD ~20y mean ann returns this year they are high up on the leaderboard at +15.64% & +9.23%. Even ARS is having a spectacular year now at +16.3% YTD.
Quality themes (as represented by our CSU, EQ & Leverage ESBs) have been muted MTD & YTD although Profitability clearly perked up in Aug at +7.37% MTD (driven by the shorts) which brings it to a respectable +8.33% YTD.
The YTD market melt up has clearly been detrimental to the short side of many factors as is most evident in Value, Size & Leverage.
Size at +21.2% ann may be the 2nd best ESB LTD but the 3rd worst YTD at -9.25%. The Risk Off trade only exacerbated that with -4.96% MTD as Small Cap Value continued to lag Large Cap Growth reminiscent of 1999!
Value factors (both of our RV & DV ESBs) have continued to plummet (-22.67% & -7.31% YTD) with the flattening of the curve due to lagging longs coupled with a massive short squeeze amongst expensive names which happen to intersect with the Long side propelling Momentum YTD. At the sector level this has largely been attributable to underperformance in Energy & Financials which remain oversold.
Finally, it’s important to put these YTD moves in the context of their longer term LTD history since the 3 worst ESBs at present (RV, DV, Size) are also the Top 3 best ESBs LTD (since Jan 2000) suggesting a significant opportunity when these factors revert back to their LT means.
Our heatmap succinctly puts your finger on the pulse of factors driving the market beneath the surface across multiple horizons. The Sector ranks table (based on bottom up aggregation of QMIT Enhanced Smart Betas within sectors) allows for sector rotation based on factors. The cross-sectional factor rank correlations tell us how correlated the factors are at this juncture vs recent 3y return correlations vs LTD (20y) return correlations. It’s worth noting that cross sectional factor rank correlations are based on alphas across the entire universe while the return correlations are only based on the information in the tails (i.e., the 5%-tile spread returns). Further, as the astute may surmise, one can extract a risk model from our factor covariance matrix which should better align one’s alphas with the risk optimization.
Please find below heatmaps with the DTD, MTD, YTD, 5 year, Post-07 & LTD returns for our ESBs as of last night’s close. Stay tuned for more ESBs which will continue to be added. These spreads are based on the best methodology (defined as highest cum return LTD) out of five that are available to clients for each of the ESBs as regards aggregation of factors within the Smart Beta cohorts.
Sector ranks based on QMIT Enhanced Smart Betas:
C-S Rank correlations for QMIT Enhanced Smart Betas:
3y Return correlations for QMIT Enhanced Smart Betas:
20y Return correlations for QMIT Enhanced Smart Betas:
EXPLANATORY FOOTNOTES (contact us)
Enhanced Smart Beta Definitions
CSU: This smart beta composite shows our Capital Structure/Usage cohort which can outperform traditional metrics like Cash/MC.
DV: This smart beta composite shows our Deep Value (or intrinsic value) cohort which can outperform traditional Book yield.
EnMOM: This smart beta composite shows our Enhanced Momentum cohort which can outperform traditional 12 month price momentum in both return & risk adjusted terms.
RV: This smart beta composite shows our Relative Value cohort which can outperform traditional Earnings yield.
EQ: This smart beta composite shows our Earnings Quality cohort which can outperform traditional metrics like Total Accruals.
Growth: This smart beta composite shows our Historical Growth cohort which can outperform traditional metrics like Sales growth.
Leverage: This smart beta composite shows our Leverage related cohort which can outperform traditional metrics like Debt To Equity.
PMOM: This smart beta composite shows our PMOM related cohort which can outperform traditional 12 month price momentum using a variety of traditional momentum factors.
Profit: This smart beta composite shows our Profitability cohort which can outperform traditional metrics like ROE.
Reversals: This smart beta composite shows our Reversals cohort which is comprised of metrics like short term reversals, RSI & other technical factors.
Risk: This smart beta composite shows our Risk cohort which is comprised of metrics like Beta, Low volatility etc.
SIRF: This smart beta composite shows our Short Interest cohort which is comprised of metrics related to Short Interest and its normalization by Float, trading volume etc.
Size: This smart beta composite shows our Size cohort which is comprised of metrics related to firm size including market capitalization.
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