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A combination of above-trend U.S. economic activity and global risk appetite has kept our Dynamic Multi-Factor ETFs in an “expansion” regime for the third straight month. Given this signal, our multi-factor ETFs remain tilted toward the size, value, and momentum factors.
Above-Trend Growth Likely to Continue in the United States
Our leading economic indicators suggest the U.S. economy should continue to grow above trend over the next few quarters. Business and consumer confidence remain high, and activity in manufacturing and construction continues to be strong. While monetary conditions are gradually tightening, the current policy stance is not restrictive, therefore supporting economic growth.
Although volatility picked up across markets, the average risk-adjusted performance of riskier asset classes remained above its medium-term trend during February. In turn, our market sentiment indicator continued to accelerate, suggesting global risk appetite continued to rise.
Quality and Momentum Factors Outperformed During a Volatile Month
The size factor had an upside/downside capture ratio of 80%/89% in February, compared to a 10-year ratio of 111%/111%. This was an unusual display of defensive performance from the traditionally cyclical factor, which increases exposure to relatively smaller companies. During the month, risk proved higher in larger companies that had run up more in price over the past few years.
Our Global Multi-Asset Group 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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