Displaying items by tag: factor investing

Bank of America is urging investors to focus on high-quality value stocks as markets show signs of overheating and sentiment shifts toward more defensive strategies. In its Small/Mid Cap Factors report, the bank noted that while small-cap value stocks lagged in the third quarter, they are now positioned for a rebound. 

Analysts pointed to several signals suggesting stronger prospects for value stocks, including the U.S. Regime Indicator’s recent shift to a “Recovery” phase, historically favorable for value leadership.

The report also emphasized that value stocks tend to outperform during Federal Reserve rate-cut cycles, similar to the current environment. Bank of America highlighted that value has started to outperform in mid caps, even as growth stocks continue to rally, noting that the “low-quality rally is in its later innings.” 

Finsum: Turning to fundamentals could be the play with rate cuts on the horizon and an shaky economy. 

The most successful macro investors don’t rely on predictions, they rely on true diversification. Rather than attempting to forecast markets, they construct portfolios of uncorrelated or negatively correlated assets that improve returns without adding risk. 

When multiple asset classes move independently, investors can use modest leverage to amplify gains while maintaining controlled volatility. This approach allows a portfolio with the same 5% volatility to generate higher expected returns simply by expanding exposure across uncorrelated assets. 

However, the strategy requires vigilance, as correlations can shift suddenly, undermining diversification’s benefits. 

Finsum: The foundation of long-term macro success lies in true diversification, careful leverage, and disciplined risk management.

The Pulse survey shows that advisors are shifting toward more flexible mandates, reducing allocations to core fixed income while increasing exposure to multisector fixed income and alternatives.  U.S. large-cap stocks—especially growth and blend styles—continued to dominate allocations, fueled in part by AI tailwinds and earnings strength. 

Active strategies also gained share, including active ETFs, which surged in usage over the past year. On the fixed-income side, core bond exposure was trimmed as advisors looked to diversify diversifiers like high yield, multi-sector, and credit-sensitive sectors. 

The average model portfolio holds around 16 distinct positions, and allocations to alternative strategies increased, with defined-outcome and multi-strategy mandates among the fastest-growing categories. 

Finsum: Advisors should look to factor portfolio tools to leverage in construction to better serve their clients’ needs. 

In August 2025, small-cap and value stocks staged strong comebacks, with the Morningstar U.S. Small Cap Index up 4.6% and the Value Index up 5.1%, far outpacing large-cap and growth peers. 

Despite this rally, value stocks still trade at a 3% discount to fair value and small caps at a steep 15% discount, making them the most attractive corner of the market. Historically, small caps thrive when the Fed is easing and long-term rates are falling—conditions now taking shape as policymakers prepare to cut rates and Treasury yields trend lower.

The question is whether this marks a lasting rotation or just a temporary head fake, but investors continue overweight exposure given the difficulty of timing inflection points. Beyond style and size, the most undervalued sectors remain communications, real estate, energy, and healthcare, each offering selective opportunities. 

Finsum: Investors seeking value and long-term upside should continue looking to small-cap stocks, where discounts remain widest and potential gains greatest.

Momentum investing has gained traction as a powerful tool for capturing upside in post-recessionary bull markets, and the iShares MSCI USA Momentum Factor ETF (MTUM) exemplifies this approach. 

Designed to overweight stocks with strong recent performance, MTUM delivered a 1,030% total return from 2009 to 2025, recovering quickly from drawdowns and outperforming broader market indices. Its risk-adjusted returns, reflected in a Sharpe ratio of 0.68 and Sortino ratio of 0.90, show that it balances volatility with consistent performance, particularly when tilted toward high-growth sectors like tech. 

Academic research backs this strategy, highlighting its resilience and efficiency during economic recoveries, especially when managed with volatility controls. While MTUM carries market risk, its focus on large and mid-cap stocks helps mitigate exposure to smaller, more volatile names. 

Finsum: For long-term investors willing to ride short-term swings, MTUM presents a disciplined way to harness the enduring power of momentum.