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Oppenheimer Russell Dynamic Multifactor ETFs have moved into a “slowdown” regime, resulting from a combination of still-above-trend U.S. economic activity, and decelerating global risk appetite. Our Dynamic Multi-Factor ETFs are now tilted toward the quality and low volatility factors.
Our leading economic indicators continue to suggest that the U.S. economy should grow above trend over the next few quarters. Business and consumer confidence remain high. Manufacturing activity remains strong, while construction shows signs of deceleration. Monetary conditions continue to tighten, and the current policy stance is now close to neutral. This environment is still indicative of above-trend growth in the medium term.
We witnessed a meaningful uptrend in risk appetite during November, but the trend did not hold as December saw global risk appetite decelerate substantially and fall below its medium-term trend. Globally, equity markets sold off, and high-yield spreads widened as investors moved into risk-off assets during the period. This deceleration led to our signal switching from expansion to slowdown.
The quality, yield, and low volatility factors all outperformed the broad market during a volatile December. Many factor investors are likely to find this unsurprising given these three factors are historically the most defensive.
After minimal market volatility in 2017, investors in the low volatility factor were rewarded with 216 basis points of outperformance over the prior year – the first year of above-market returns since 2015.
Despite the expansion regime underperforming in December, both multifactor strategies outperformed their respective market cap indices for the year, highlighting the merits of diversifying through a dynamic multifactor strategy. Additionally, the Russell 1000 multifactor index outpaced all individual single factors, showing how a bottom-up strategy can add value through factor interaction.
Our Multi-Asset Team will continue to monitor the economic environment and global risk sentiment for signs of regime change, which we will reflect in the potential monthly repositioning of the Dynamic Multi-Factor ETFs.
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Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Alternative weighting approaches (i.e., using factor weighting as a measure), while designed to enhance potential returns, may not produce the desired results.
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