Which factors have put together the strongest start to 2026?

US Equity Smart Beta

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)

• After ending 2025 in the middle of the pack, Growth and Momentum have reasserted their leadership, occupying the top two positions through the first half of the year. This pattern is reminiscent of 2024, when both factors led market performance and drove returns across equity markets.
• Buybacks have experienced a notable reversal in leadership. After ending 2025 in first place, the factor has lagged significantly, spending the first half of the year near the bottom of the rankings.
• Despite leading the core market factors during Q1, Dividend Payers have moderated and settled back into a mid-ranked position. While the factor has lost some strength, its performance remains a notable departure from the past two years, during which it occupied the lowest tier of the rankings.
• Factor dispersion has remained elevated this year. The performance spread between the highest- and lowest-performing factor groups currently stands at 31% year-to-date, roughly 8 percentage points above its historical average.

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 throughout the entire timeframe, but we also know inherently what comes with a buy and hold commitment to only one group. The first three months of 2026 showcased this issue most recently as these factors struggled throughout Q1. Other examples include 2022 or 2000-2002- all tough spans for growth, tougher than many could endure. While buyback has turned it around over the last decade, there was a five year stretch from 2014-2018 where the factor didn’t crack the top half of performance rankings. This can be tough to stomach as other areas continue to excel.

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, so return chasing 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.

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):

• Momentum ranks as the top-performing factor through the first half of 2026, reaffirming its market leadership after also finishing first in both 2023 and 2024. Performance accelerated in the second quarter, with the factor gaining more than 11%, making it the strongest improver among all factor groups.
• Despite finishing as the top-performing factor in 2025, Buybacks have struggled to maintain their strength in 2026. The factor is only marginally positive year-to-date and currently ranks second to last among the factors.
• The Growth factor currently ranks second overall in 2026 and was also the second-best performer in Q2. The group's strong rebound marks a significant turnaround from 2025, when it finished last among all factors. In fact, this is the first time since 2023 that Growth has held a top-two position, reflecting a sharp improvement in performance.