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Factor investments: Success factors: How well ETFs do in the crisis message


by Christoph Platt, Euro am Sonntag

EFirst one of the most violent crashes in stock market history, then a meteoric price recovery – 2020 is also a year of extremes from an investor’s perspective. Not all investment strategies have dealt with this environment equally well.

uro am Sonntag took a look at various concepts known in the ETF industry as factor investments. This means approaches that pursue a special style. From a known stock index, stocks are selected according to certain criteria. This is intended to increase returns or reduce volatility.

A handful of strategies have now been established. “Academic research shows that five style factors can generate long-term returns on stocks compared to the broad market,” said Hamed Mustafa, ETF expert at Blackrock. These include the focus on small companies (size), stocks with low volatility (minimum volatility), healthy companies (quality), undervalued stocks (value) and stocks in an upward trend (momentum).

The editors examined the development of the factors during the slump from February 19 to March 23 and during the subsequent recovery. The basis is – on a euro basis – the corresponding sub-indices of the MSCI World, which contains the most important stocks of the industrialized countries worldwide.

The best way to get through the crash was to get investors with the MSCI World Minimum Volatility. The index, which shows the development of low-fluctuation stocks, lost “only” 29 percent in value during the price drop. The strategy has thus lived up to expectations: minimum volatility stocks usually give way less than the market average in troubled times.

The strategy was not quite as strong in the recovery: the MSCI sub-index has risen by almost 20 percent since 24 March. Nevertheless, it remains promising, especially for more cautious investors. “Our indicators point to declining economic growth from an already low base,” says Mustafa. “Experience shows that minimum volatility stocks can perform particularly well in such an environment.”

The momentum strategy has also survived the bear market relatively well. The MSCI World Momentum declined 31 percent. “The behavior of the factors in the stock market crash was basically a continuation of the pre-crisis trends,” said Eric Wiegand of ETF provider Xtrackers. Even before the pandemic, it had paid off to invest in stocks that had performed particularly well in the months before.

However, the strategy has not shone since March 24 and only gained 19 percent. In its latest market commentary on style factors, the ETF house iShares advises to underweight the momentum factor significantly. On the one hand, this is due to the weaker economic outlook: As a rule, the strategy develops best with strong economic growth. On the other hand, the corresponding shares are currently relatively expensive.

The quality concept showed acceptable performance during the turbulence on the stock exchange. The MSCI World Quality was down 32 percent. The focus on companies with low indebtedness and stable earnings growth slowed the crash somewhat.

The following rally was pleasant for fans of this strategy. The factor index rose by 24 percent. This outperformance is unlikely to end. Quality stocks have become more expensive, but the economic environment continues to speak for this rather defensive style. And if prices continue to rise, quality investors, unlike in the past, are not necessarily on the move with the handbrake on. “The participation of the quality factor in rising prices has increased significantly in the last five years compared to historical levels,” said Xtrackers expert Wiegand. “In another recovery scenario, quality can be an interesting and conservative approach for investors.”

Investors who focus on small caps experienced a change of emotions during the corona crisis. The size factor declined by 37 percent in the weeks of the crash – no other strategy was weaker. In the recovery phase, the MSCI World Size jumped the strongest upwards, gaining 28 percent since its low for the year. It thus reflects the typical behavior of small and mid caps, the prices of which are usually more violent than the broad market. Small-cap companies are often particularly lucrative in an economic upturn, but because the prospects are currently uncertain, exposure to small cap stocks should be used with caution.

Followers of the value style had to suffer again. The strategy of betting on undervalued stocks not only lost an above-average 35 percent during the crash, but also subsequently recovered weakly (19 percent). However, the past two weeks have been good for particularly inexpensive stocks, which have grown faster than the broad market during this time. “The value factor is currently arousing the interest of our investors,” reports Wiegand. “After a long period of underperformance, especially during the crisis, value stocks seem to be gaining performance.” The catch-up potential is huge, especially if the economy recovers faster than expected.


Investment strategies

The five established style factors used in the ETF industry have developed differently during the crash in February / March and during the recovery since March 24th. Low volatility stocks were the least sluggish and small rally stocks were strongest in the rally. For comparison, the long-term performance: Here the momentum strategy (title in the uptrend) is clearly ahead.

Recommended ETFs

In the current weak economic environment, stocks from solid groups are in demand. The third will remain so in the medium term. With the iShares Edge MSCI World Quality Factor ETF, investors invest globally in companies with low debt, stable profit growth and a high return on equity (ISIN: IE 00B P3Q Z60 1). By contrast, risk-taking investors rely on the catch-up potential of highly undervalued stocks. The Xtrackers MSCI World Value ETF buys worldwide stocks with a low price-earnings-ratio and book-book value ratio (IE 00B L25 JM4 2).


Image sources: saknakorn /, zhaoliang70 /, Finanz Verlag

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