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Below I have listed the performance of exchange-traded funds that replicate these factor indices. Given the more recent inception dates of these funds, we do not have the full histories that we have for the underlying indices above, which is why I continue to show both in this series. These are certainly not the only ways to get exposure to these factors, and increasing competition in the realm of smart beta is likely to continue to further push down expense ratios in the industry going forward. Value ( RPV), Low Volatility ( SPLV), Dividend Growth ( NOBL), Equal-Weighting ( RSP), and Quality ( SPHQ) draw from the S&P 500 ( SPY) - they are simply alternative weightings to that traditional capitalization-weighted index. Size ( IJR) draws from a separate Standard and Poor's index, the S&P Small Cap 600 index. Momentum ( MTUM) draws from the broader MSCI USA Index.
For these seven factors and the S&P 500, I have also calculated the standard deviation of monthly returns. In this series, I am using this volatility measure as a risk proxy. While some buy-and-hold investors may counter that they have a long-term view and are not impacted by market volatility, unfortunately, many individual investors all too often can be whipsawed by market swings.
Some investors may prefer strategies with less variability of returns like Low Volatility and Dividend Growth. I think these calculations give readers a feel for the volatility differences in the various strategies. We will also track this measure to ensure that these strategies are delivering on their promise of a smoother return profile. Dividend Growth, a strategy that has delivered its historical outperformance in down markets, is lagging in 2020 without meaningfully lower realized volatility, a historical anomaly. Low Volatility, August's laggard, has still delivered negative returns year-to-date, meaning its low realized volatility offers cold comfort to investors like me. Momentum and Quality, the outperformers in 2020, have also delivered slightly lower volatility over the last year. Size and Value, the underperformers in through 2020, have produced lower returns with higher realized volatility.
As mentioned in the lede, Momentum ( MTUM) outperformed again in August with nearly a 10% total return on the month. Unlike many of the factor tilt indices that replicate the S&P 500, the iShares Edge MSCI USA Momentum Factor ETF replicates the broad MSCI U.S. Index. In August, the inclusion of Tesla ( TSLA), which is not owned in the S&P 500, contributed a positive 267bp of the return differential as the electric vehicle maker soared 74%. The Momentum strategy's ownership of Tesla, contributed the entire difference in monthly return between the Momentum Index and the S&P 500. Elon Musk's company is now worth roughly the combined market capitalization of the developed world's entire auto industry, excluding Toyota - a stunning valuation figure for which I am skeptical.
Quality ( SPHQ), which has ridden the relative Tech gains to market-beating returns on the year, outperformed again in August. The strategy, which is 41% allocated to the Tech sector, also benefited from no ownership of underperforming utilities and a limited weight to financials in August.
While August was another month in the win column for Growth stocks, Value( RPV) did notch a 4.9% total return. While certain Consumer Discretionary and Industrial names did well for the value-based strategy, overweights to Energy and Financials and that tech underweight continued to drag down relative performance.
Equal-Weighting ( RSP) also lagged as the tech-focused megacaps again outperformed. From a pure sector perspective, equal-weighting is most underweight Information Technology (-14%) and Communications (-6%), which were the two best performing sectors on the month for the S&P 500.
Dividend Growth ( NOBL) returned 4.0%, lagging the S&P 500 as the tech giants it is underweight rallied on the month. While 54 of the 66 Dividend Aristocrats posted positive returns on the month, their gains were not able to keep pace with the red-hot tech sector.
Size ( IJR) also underperformed in August as underweights to Tech and Communications and overweights to Financials and REITs weighed on performance. While small caps tend to lead in market recoveries, the Size factor is lagging the tech-influenced large caps since the market bottom in March.
Low Volatility ( SPLV) was the laggard in August as higher interest rates weighed on the defensive equity allocation, which returned just 2.9% on the month. An underweight to Tech, a security selection miss in Health Care, and an overweight to lagging Consumer Staples all hurt the strategy in August.
Tech was the story in August... as it was in July. The best performing strategies - Momentum and Quality - were overweight. Strategies that are naturally underweight like Dividend Growth, Equal-Weighting, and Value lagged. While Tech can continue to ride this momentum in the short-run, it feels like the relative rally for this component of the market is increasingly stretched. Investors looking at just the S&P 500's returns should realize that all of the return has come from Tech and tech-like stocks outside of that sector like Consumer Discretionary's Amazon and Communications' Facebook ( FB). Ultimately, lagging sectors and strategies will play catch ......
Disclaimer: My articles may contain statements and projections that are forward-look