For instance, U.S. momentum, on the surface, looks pretty extended given its outperformance so far this year (Figure 5), even though it was the worst-performing factor in 2016. Value and small-cap have both struggled this year, and remain out of favor given disappointments over an inflation-driven cyclical surge that has yet to manifest itself.
Figure 5. US Momentum Runs Ahead Of Everything Else In 2017
For a larger view, please click on the image above.
However, digging into momentum, one finds that the current basket doesn’t look too extended from a valuation standpoint. According to iShares, its Edge MSCI USA Momentum ETF (MTUM) trades at 23x trailing EPS (as of 7/25/2017), not too far above the 22x multiple for the iShares S&P 500 ETF (IVV).
This is partly due to the May 2017 rebalance, where high-flyer stocks like FB, AMZN and GOOGL dropped out of the basket due to their relative volatility to the market. As a result, maintaining exposure to momentum appears to make sense despite the strong YTD outperformance.
From a valuation standpoint, “low volatility” looks interesting relative to its levels prior to the July 2016 Brexit vote, but has shown to be more prone to interest rate swings versus the other factors.
“Value” looks even more attractive versus post-November election levels given its underperformance, but a meaningful economic slowdown could weigh on its near-term performance, as would a backup in credit spreads.
Finally, according to MSCI, “quality” looks unattractive due to a combination of high relative valuation and what appears to be a peak in global profitability and rising corporate leverage (most “quality” factors track return-on-equity, which is influenced by leverage), but “quality” would likely benefit from a risk-off environment.