Reviewing factor performance for 2025.

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)

• Buyback stocks had a strong 2025, gaining 17.91% to be the only factor to outpace the benchmark.
• The core of the market continued to dominate as mega cap names carry the index higher. The benchmark has found itself in the top half of the rankings in each of the last three years, with 2017-2020 being the only other instance of prolonged benchmark strength.
• Risk-off areas of the market continue to underperform, with dividends and low volatility sitting in the bottom two spots this year. Dividends have finished in last place for two consecutive years, the first time a factor has done so in our dataset.
• After two top-three finishes, the momentum factor representative cooled off in 2025 but still finished the year up 8.37%.

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 stocks have turned around in recent years, with it in the top half of groups in five of the last seven years, becoming the second-best performing factor since the end of 2007.

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 did well in 2025, 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, which has beaten the "average" portfolio of equally weighted factors despite a poor stretch the last few years.

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 finished 2025 in the black… and by a wide margin. Every group gained more than 15% for the year for the first time since 2009 (was close in 2013 and 2017).
• Developed markets continue to show a preference for value over growth stocks. Value outpaced growth by 5% last quarter, bringing its outperformance to 11.7% through Q3.
• Momentum works well in environments of stability, and the factor was able to take advantage of a consistent leadership structure. The momentum factor has finished the last six of seven years in the top three best performing international factors, including four first-place finishes.