It is a rare occasion when one can say that “smart beta underperformed”. More typically, as one strategy falls another rises. However, over the first quarter of 2017 nearly all of the S&P 500 factor indices trailed the benchmark S&P 500.
On this occasion, the size factor was at least partly to blame: when Equal Weight underperforms (as in this quarter), the “average stock” underperforms, and hence the average stock-selection strategy – if it is not capitalization weighted - faces headwinds.
Growth was the exception, which was boosted in particular by strong performance in the largest technology companies; the S&P 500 Information Technology sector was up by 12.57% over the quarter. (Further sectoral performances may be found in our U.S. Index dashboard .)
However, any such underperformance was muted, as every strategy performed within a 3% range of the S&P 500. In other words, the dispersion of performances among factor indices was low. In part this can be explained by a relative lack of overall market movements - either in individual stocks or in their averages. Over the first quarter of 2017, volatility in U.S. equities was unusually low, as was dispersion. The VIX® recorded its lowest quarterly average since 2006, while S&P 500 monthly dispersion averaged its lowest in two years.