The Quality Factor Is Now King

The Quality factor completed a six-week climb to the top of the factor rankings, knocking Value down to sixth place in the process. Financials and Technology sit atop the sector rankings, as Telecom falls to the bottom. Not much change from a global perspective, with Latin America still at the helm and Canada relegated to the basement.

Sectors: The Vanguard Financials ETF (VFH) leads the Sector Benchmark ETFs again today, just as it has for 17 of the past 19 weeks. It has gained 23.9% since the U.S. election and 5.5% year to date. Vanguard Information Technology (VGT) is in second place for a fifth week and has been a steady climber for about nine months. It has advanced 10.3% in 2017, 12.2% since the election, and 25.9% since June 30, 2016. Health Care remains at the mercy of political winds but has gained an impressive 8.5% in just the past six weeks, allowing it to secure the #3 spot a week ago. Most other sectors continue to post strong momentum scores, although there are three exceptions. Real Estate reversed course about a week ago and is quickly losing its momentum. Energy has been in a downtrend since mid-December and remains weak, and Telecom is the new sector on the bottom. Vanguard Telecommunications (VOX) has been drifting lower since January 4, and its decline accelerated this past week, officially putting it into a downtrend.

Factors: Quality is king, and the iShares Edge MSCI USA Quality Factor ETF (QUAL) tops the Factor Benchmark ETF rankings this week, wresting control from Value. After months of stable relative-strength rankings, we are now seeing somewhat volatile downside moves. The performance declines have been rather small, and even the weakest factor has a healthy momentum score. However, the falloffs in relative strength have been more dramatic. High Beta plunged from first to last in the two-week span that ended a week ago. Small Size went from third to eighth at the same time and completed its drop to last place today. Value held the top spot the past two weeks, and today it is down to sixth. The leaders have been falling out of favor quickly following slow climbs to the top. Quality has now completed a six-week climb from eighth place, hoping not to repeat the fate of its recent predecessors. Market Cap moved up to the second-place spot, which means that the majority of all the “new” smart-beta factors are underperforming the old-fashioned market-capitalization method of indexing.

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