High Beta, Growth, and Momentum all performed well in the third quarter of 2017, while Equal Weight (a bellwether for alternatively weighted indices in general) underperformed. Strong quarterly outperformance from the IT and Financials sectors – which are relatively concentrated in large, high beta S&P 500 stocks – provides a sectoral rationale. From a macro perspective, U.S. Treasury bond yields have increased across the maturity spectrum in the past year (and quarter); higher dividend-paying stocks have underperformed as the more traditional income sources cheapened.
With strong tilts away from both high beta and momentum - and moderate tilts towards higher dividends, smaller stocks, and higher quality stocks - the factor exposures of the S&P 500 Minimum Volatility Index have conspired to hurt its performance this year. The Minimum Volatility strategy has underperformed in eight of the last nine months, and has the lowest total return of any of our factor indices on both 3- and 12-month rolling basis.
However, in an environment of relatively low volatility and during a strong bull market, risk management strategies such as Low Volatility and Minimum Volatility might reasonably be expected to underperform. The S&P 500 Low Volatility Index – for example – historically has captured about two thirds of the gains made by the benchmark S&P 500 in quarters during which the latter gained. Viewed in this context, the quarterly and 12-month performance of the S&P 500 Low Volatility Index is entirely typical.