March Madness is a fantastic time of year to talk about playing offense and defense. As we wrote about in our 2025 outlook and have revisited a time or two since, in markets you can play offense with momentum and defense with low volatility. Combining these together in portfolios builds resiliency – something investors have definitely needed this year. This has played out well year-to-date with the recent correction, as the chart below shows. Going into the low (left hand side), momentum and low volatility were almost mirror images of each other. During the rebound, momentum has outpaced low volatility and the index on the way back up. Altogether, a 50/50 split portfolio would have returned 3.2% year-to-date, thanks in part to a much lower drawdown.
Source: Morningstar Direct
Sectors have become very concentrated due to the size of some of the top stocks. Sectors also now behave differently than they have in the past due to classification changes in recent years and the prevalence of technology throughout our economy. Allocating to sectors still remains a value-add, but factor investing can provide more consistent exposures through systematic processes and implementation. Several years ago, “Smart Beta” and factor investing was all the rage in the ETF world, back before Bitcoin, options strategies, and 3x levered single stock ETFs were things. This last week at the ETF Exchange conference, I tried to bring back conversations around factor investing (As well as praising more active managers for coming into the ETF wrapper). Don’t worry, I still fielded questions on Bitcoin and private credit ETFs despite being on an equity panel.
Me probably saying something cool about combining momentum and low volatility.
We will continue to build portfolios for resiliency and evolve as the product set and world does. Please reach out to the investment team with questions or other thoughts on portfolio construction and ETF selection.
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For more content by Grant Engelbart, VP, Investment Strategist click here.
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