Factor investing took the ETF world by storm during the last few years. Countless factor—also referred to as “smart-beta”—ETFs were launched, giving investors the chance to outperform the broader stock market.
This year, the enthusiasm for these products has died down a bit, perhaps because they aren’t as new or exciting as they were before. Still, factor ETFs aren’t going away anytime soon; if anything, they’ve made the transition from just a hot trend to a mainstay in many investors’ portfolios.
What Are Factors?
According to MSCI, factors are any stock characteristics “that can be shown to be important … in explaining risk or returns.”
There could be thousands of factors, but most do not outperform the market over the long term. Historically, value and growth were the two factors that investors focused on. More recently, factors like low volatility, momentum and others have shown potential to outperform in certain market environments.
Here we’ll run down the best-performing factor ETFs this year, focusing only on the funds that offer broad exposure to U.S. equities.
Factor Of The Year
A quick glance at our list reveals that growth is the factor of the year. ETFs that target growth stocks—whether it be within large-cap, midcap or small-cap stocks—are all up 10% or more.
Top Performing Factor ETFs Of 2018
There are many ways ETFs and their underlying indexes attempt to target a particular factor, which can lead to significantly different returns among various funds targeting the same factor. But these three funds all track the same S&P 500 growth index—which selects growth stocks based on sales growth, earnings growth and momentum—leading to nearly identical performance.