Two Market Anomalies That Still Work

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Two Market Anomalies That Still Work

US stocks feel like they’ve hit (at best) a pause or (at worst) a brick wall over the last month, so we went looking for strategies that are outperforming. First, a reminder of some recent return data:

  • S&P 500 1-week return: +1.0%
  • S&P 500 1-month return: -2.2%
  • S&P 500 YTD return: +13.3%
  • Russell 2000 1-week return: +0.1%
  • Russell 2000 1-month return: -2.6%
  • Russell 2000 YTD return: +13.1%

Against that backdrop, here are two approaches that are working just now viewed through the lens of major exchange traded funds that track them:

#1: Stock price momentum. The two largest ETFs here are MTUM (iShares MSCI Momentum Factor) and PDP (Invesco DWA Momentum). Their recent returns:

  • MTUM: 5-day +1.4%, 1-month +1.6%, YTD +13.2% (better than the S&P except for a 10bp lag YTD)
  • PDP: 5-day +1.4%, 1-month -0.6%, YTD +18.3% (better than the S&P all around)

Worth noting, these two funds have less overlap than you’d think:

  • Top 5 positions for MTUM (29% of the fund): Microsoft, P&G, Johnson & Johnson, Merck and Pfizer
  • MTUM top sector weights: Health Care (30%), Technology (18%) and Consumer Staples (13%)
  • Top 5 positions for PDP (14% of the fund): Domino’s Pizza, American Tower, Mastercard, O’Reilly Automotive, and Ball Corp
  • PDP top sector weights: Technology (24%), Consumer Cyclicals (17%) and Industrials (15%)

The bottom line here is that two ETFs with different approaches to momentum-based investing (and therefore different holdings) are generating good results in a tough tape. So even if one is cautious about technical analysis, the results show momentum is a useful factor just now.

#2: Low volatility. The two heavyweight ETFs here are USMV (iShares MSCI Min Vol) and SPLV (Invesco S&P 500 Low Volatility). Their recent returns:

  • USMV: 5-day +1.5%, 1-month +1.3%, YTD +13.8% (stronger than the S&P all around)
  • SPLV: 5-day: +0.8%, 1-month +1.6%, YTD +14.6% (lagging by 20bp over the 5-day period, better otherwise)

Here is what they own:

  • Top 5 positions for USMV (8% of the fund): Visa, Waste Management, McDonald’s, Pepsi, and Republic Services
  • USMV top sector weightings: Technology (16%), Health Care (14%) and Consumer Staples (12%)
  • Top 5 positions for SPLV (6% of the fund): Republic Services, Coca-Cola, American Water Works, Nextera Energy, and Air Products
  • SPLV top sector weightings: Utilities (24%), Real Estate (19%) and Financials (19%)

The bottom line on this approach is that “min vol” funds are working reasonably well despite radically different approaches to sector weightings.So like the momentum factor, low price volatility is a useful factor just now.

Final thought: as we have highlighted in past reports, both momentum and min vol factors are well-documented market anomalies that “shouldn’t” work but still manage to generate outperformance. Both, of course, seem to fly in the face of the weakest form of market efficiency theory but that has been the case for years. That they continue to hold their own in a choppy market shows they remain relevant today.