Weekly Edge: Factors With Persistence Of Performance

Includes: EZU
by: Ron Rowland

Persistence of performance, or the ability of an outperforming ETF to continue its market-beating run, is another way to describe the so-called anomaly that allows momentum strategies to work. It can be seen in stocks, sectors, country funds, and investment factors. Over the past year, it has been most evident among investment factors.

Sectors: The spread between the top-ranked and bottom-ranked Sector Benchmark ETFs widened this past week, as the recent performance dichotomy extended both the positive and negative trends. The 64-point spread has Technology providing the upside leadership, while Energy is the clear laggard. All seven sectors that were in the green a week ago posted momentum improvements today. Technology has been in the top spot for eight of the past 10 weeks, with Utilities taking the helm the other two weeks.

This combination of Technology and Utilities is an odd one, as Technology is typically associated with aggressive market action, while Utilities is a defensive sector. However, you can't argue with reality, and that is the situation the market has been faced with the past two months. A drop in crude-oil prices, trading below $48 today, has pushed the Energy sector deeper into the red and to the bottom of the relative-strength stack.

Factors: We've been seeing strong persistence of performance in the relative-strength rankings for the Factor Benchmark ETFs. High Beta was in the leadership role for four solid months, and now Momentum's reign has reached the three-month mark. Growth and Low Volatility have also produced above-average results by remaining in the upper half of the rankings for a dozen weeks.

However, this persistence of performance has not been a trait enjoyed by all factors. Small Size dropped from third to ninth in the first half of May, where it remains today. Value is also showing persistence but not the kind we like. Value has not been able to get any higher than two spots off the bottom for 11 straight weeks.

Global: Very little has changed in the global rankings this week. The U.S. dollar has been trending lower for the past five months, which favors traditional international ETFs that do not employ currency hedging. As a reminder, none of our Global Benchmark ETFs are currency hedged, and therefore they reflect the performance of the designated stock markets plus any gains or losses in the underlying currencies versus the U.S. dollar.

Although it began the year in the leadership position, the U.S. has been relegated to the lower half of the global rankings for the better part of the year, as these currency headwinds take their toll on relative strength. The top-ranked Eurozone benchmark, the iShares MSCI Eurozone (BATS:EZU), is up 18.7% year to date thanks to a 5.9% rise in the euro, which added to the 12.8% gain for stocks.

The following Edge Charts are market momentum snapshots. They provide a quick and easy way to help you visually get a handle on the overall state of the market. With these charts, you can assess both the relative strength and absolute strength (momentum) of more than 30 global equity market segments. Please refer to the Edge Chart User's Guide for further explanation.

Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.