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No Place to Hide for US Equity Beta Strategies

There’s been no place to hide for US equity beta strategies this year, but the distribution of pain varies widely from a risk-factor perspective, based on a set of representative exchange-traded funds.

 

By James Picerno

The factor funds with the softest haircuts year to date: large-cap growth, momentum and low-volatility. By contrast, the various flavors of small cap , along with mid-cap value, have suffered the most.

For the moment, iShares S&P 500 Growth (NYSEARCA:IVW) has fallen the least in 2020 through yesterday’s close (Apr. 6) for the main cuts of US equity factors. The fund is down 11.6% year to date. A close second: iShares Edge MSCI USA Momentum Factor (MTUM), which has shed a relatively light 13.4% so far this year. In third place: iShares Edge MSCI Minimum Volatility USA (USMV), which is nursing a 14.7% year-to-date slide. In all three cases, the losses are milder vs. the benchmark: SPDR S&P 500 (NYSEARCA:SPY), which is down 17.2% this year.

By contrast, the deepest loss for our set of factor funds: iShares S&P Small-Cap 600 Value (IJS), which has tumbled a steep 38.9% year to date. The small-cap growth (IJT) and small-cap core (IJR) funds are also posting relatively steep losses. Note, too, that mid-cap value is the second-worst performer this year: iShares S&P Mid-Cap 400 Value (IJJ) has declined a hefty 35.6% in 2020 through Monday’s close.

The deeper losses in small-cap and value funds this year aren’t surprising. A long line of research asserts that small cap and value factors harbor bigger risks. In the long run, those risks have shown a tendency to deliver bigger risk premia vs. their growth and benchmark counterparts. The question is whether that history will survive the current crisis?

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The optimistic view is that the bigger decline in small cap and value aligns with unusually high expected returns vs. growth and the broad market benchmark. It’s a compelling argument, or so a long-run view of history suggests. The mystery is whether the future will bail out long-held beliefs for small cap and value strategies. Meantime, hope springs eternal, albeit for a smaller subset of investors who continue to keep the faith that small and inexpensively priced stocks still offer higher risk premia.

Meantime, one thing is certainly clear: small cap and value strategies are in a much deeper hole these days and face a steeper challenge for rebounding in the months and years ahead.