Quality-oriented US stocks have staged a notable turnaround in 2023 according to the Morningstar Global Factor Indexes. In fact, the Morningstar US Quality Factor Index has gone from worst to first, with an 8.5% return in 2023 as of February 22nd after a 24.4% decline in 2022. Quality has well outpaced the 4.5% return of the broad US equity market in 2023 as reflected by the Morningstar US Target Market Exposure Index.
In fact, 2023 has seen a reversal in fortune across a range of US equity market factors including low volatility, size and value.
Alex Bryan, Director of US Equity Product Management, Morningstar Indexes:
“It’s been a tale of two markets when examining the US equity factor landscape since the start of the year. Quality has certainly been a standout in 2023, while it was the worst performer in 2022, a challenging year for the US equity market. While the performance pattern for quality may seem counterintuitive, as many presume it to be a defensive factor, our research has shown that quality has exhibited a similar level of risk to the broad market over the past decade. Low volatility, on the other hand, protected investors more from the market downside in 2022 than other factors, but there has also been less upside participation in 2023.”
The Morningstar Global Factor Indexes are designed to deliver efficient, strong exposure to industry standard equity factors. The indexes are constructed with transparent, rules-based methodology that aims to mitigate unintended sector and regional biases and facilitate investability. You can find a more detailed analysis of factors by Alex in his recent paper.
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