Tuesday was a very poor day for momentum strategies. Not only did the leaders struggle, but the laggards also had a fantastic day. One way we can quantify this is by looking at baskets of stocks separated by momentum. For today, we’ll use five baskets, or quintiles, to gauge how the leaders (quintile 5) performed against the laggards (quintile 1). Tuesday, the spread between the leader basket and laggard basket was -3.84%. This is quite a change given how well momentum has done recently, specifically in the second quarter when the top momentum quintile gained 11.76% while the bottom momentum quintile gained 5.26%. Nonetheless, the big single-day outperformance by the laggards is notable and raises concerns of a rotation underneath the surface.

Historically, forward returns for momentum and the broad market are suboptimal following such a weak day for momentum stocks. Using the iShares MSCI USA Momentum Factor ETF (MTUM) as a momentum representative and the S&P 500 Index (SPX) as a broad market representative, the table below shows forward returns for each following equal to or worse single days for momentum, excluding clusters within six months. Many occurrences took place in the early 2000s and during the GFC which heavily contributes to the lower average and median forward returns for both benchmarks. However, since 2010, the forward returns have been noticeably better for both MTUM and SPX.

The last three occurrences did lead to some weaker market environments for either the market or momentum strategies. February 2021 was the start of a major rotation and momentum struggled while the S&P 500 did quite well moving forward. Next, August 2022 ended up being a short-term top for the S&P 500 while MTUM shined on a relative basis over the next six months. Most recently, late January 2025 led to a nearly 20% decline before recovering to all-time highs for both SPX and MTUM. All in all, it’s not a great look for the market when looking at the last few occurrences. However, until we see more technical evidence of deterioration, there is not much to suggest a major change is underway. If there is anything to be taken from this data, then it’s that the high-flying momentum names may regress over the next few months, so be mindful when initiating new positions, especially those trading in heavily overbought territory.

As we do each quarter, today we update our U.S. and International "Smart Beta Quilts" and Factor Studies through the second quarter of 2025. Before the term “factor investing” became commonplace within the financial community, there were two main "factors" that advisors were already using within client portfolios: growth and value. Advisors commonly used various market capitalization sizes or some form of style rotation, but beyond that, there was not a lot of access to many of the security selection processes that are available today. The term "factor" is broad, and there is a healthy debate about what should fall into that category. Arguably, any indexing strategy in which securities are chosen systematically, based on measurable attributes, to produce superior returns over the asset class would qualify. Still, that covers a wide range and is a vague definition, but we can agree it goes well beyond "growth" and "value."

US Equity Smart Beta

Other factors commonly accessible through ETFs today are momentum, low volatility, quality, dividend achiever, and buyback strategies. All these factors are designed to pinpoint a certain investment theme within the marketplace, and systematically allocate to that theme. For instance, the “low volatility” factor is represented by the Invesco S&P 500 Low Volatility ETF (SPLV), a fund that seeks exposure to the 100 stocks with the lowest volatility in the S&P 500. Most of the factors examined offer better performance than the benchmark, the SPDR S&P 500 ETF (SPY), through certain durations. However, no single factor ETF has been the best performer every year, or even most of the years...nor has any single factor ETF been the worst performing every year or most of the years.

Factor Return Observations (US Equities)

• Growth reclaimed its position at the top of the pack after a rocky first quarter. If this continued through the rest of the year, it would be the first instance of back to back winners since Value led the way in 2012 & 2013
• At the other end of the spectrum, risk off names have taken a backseat as markets rallied to new all-time highs. Dividend names reclaimed their position at the bottom of the list after lagging in 2025. Back to back “losers” haven’t been observed in our dataset.
• The benchmark has climbed back up into the top half of the rankings as the overall core of the market remains quite strong. The benchmark has found itself in the top half of the rankings in each of the last 3 years (note 2025 is still only half a year…) 2017-2020 was the other instance of prolonged benchmark strength.
• While it is still early on in the year, the dispersion between the best performing (growth) factor and the worst-performing (dividend) factor is relatively tight. The 12.9% spread is well below the full year average of 22%. Again- we are still only halfway through the year.

It is About Time in the Factor, Not Trying to Time the Factor

Our goal with the research above is to illustrate the range of available factors and the necessity of discipline in applying these factors over time. We want to promote “good behavior”, as it relates to any investment process or product. This is perhaps the most important observation from the data above; we illustrated the outcomes generated by a few common behaviors using the same investment universe, and the outcomes vary dramatically.

There are the “buy and hold” outcomes, which show buyback and growth as the best performers, but we also know inherently what comes with a buy and hold commitment to only one group. 2022 was indicative of that difficulty, with growth underperforming most other areas. While not visible above, 2000-2002 were tough years for growth, tougher than many could endure. Buyback has found itself in the bottom half of factor performance in 8 of the 17 years of the above study.

Another approach is to equal weight all seven factors in a portfolio and rebalance that portfolio once a year. This gives you a baseline that notably underperforms the benchmarks over the last 10+ years. We also looked at the hypothetical behavior of buying the best-performing factor from the previous year and holding that factor for the entire next calendar year; we called this “Return Chasing,” and while no portfolio manager markets themselves this way exactly, it is an emotional bias that creeps into many investors’ psyches.

This “Return Chasing” portfolio tracks a hypothetical investor who sees that no strategy could beat the benchmark last year, so they just buy that factor for the next year. As mentioned previously, this has only “worked” in back to back full calendar years from 2012-2013… and while growth is doing well so far this year, return chasing still hasn’t worked quite well over our back test. On a cumulative basis, return chasing has massively underperformed not only the other “strategies,” but also what buying-and-holding almost any other factor would have provided. The factors themselves are not the problem, as many create substantial alpha relative to the market. Bad behavior can create bad returns out of good products, and constantly chasing last year’s best-performing factor often exemplifies that reality despite its successes so far in 2025.

The opposite of return chasing is the contrarian approach, which buys the worst-performing factor from the previous year and holds it for the subsequent calendar year. The “Contrarian Switching” portfolio illustrates what is missed when an investor dumps a factor for having a bad year. A good stock can become a bad stock and remain such for a long time, so a good factor is less likely to stay perennially out of favor because it should have a process of systematically eliminating bad stocks – this is evidenced by the outperformance of the “Contrarian Switching” strategy. After working well through Q1, our hypothetical contrarian strategist has watch their relative outperformance go up in smoke as dividend names have fallen back down to the bottom of the pack.

International Equity Smart Beta

These strategies can also be applied to factor representatives from international equities, which, as we can see below, demonstrate similar tendencies to their domestic counterparts. Note that the representatives below are only for developed market equities, as there has not been enough historical representation of factor exposure in emerging markets to represent a robust examination.

Factor Return Observations (Intl Equities):

• All the international groups find themselves in the black so far in 2025… and by a wide margin. Relative loser Dividend’s near 12% gain through 6/30 would be the largest recorded laggard gain since 2017.
• International momentum has stormed back into first place after quite a productive 2nd quarter. The group is posting its best year since 2013 and finds itself in the top spot as we open Q3. If this trend continued through the end of the year, the factor would “three-peat” for the first time in our observed dataset.
• Outside of an increase in rank for low volatility names, overall rankings have remained quite similar to those in 2024. This adds to the weight of the evidence for a continuously strong momentum market as trends persist further into 2025.

Each week the analysts at NDW review and comment on all major asset classes in the global markets. Shown below is the summary or snapshot of the primary technical indicators we follow for multiple areas. Should there be changes mid-week we will certainly bring these to your attention via the report.

Remember, these are technical comments only. Just as you must be aware of fundamental data for the stocks we recommend based on technical criteria in the report, so too must you be aware of important data regarding delivery, market moving government releases, and other factors that may influence commodity pricing. We try to limit our technical comments to the most actively traded contracts in advance of delivery, but some contracts trade actively right up to delivery while others taper off well in advance. Be sure you check your dates before trading these contracts. For questions regarding this section or additional coverage of commodities email james.west@nasdaq.com.

Data represented in the table below is through 07/01/2025

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