Betting on different parts of the market is tricky business. That’s one takeaway from a “Periodic Table” of calendar-year returns for Morningstar Factor Indexes. In any given year, a different group of stocks could be on top. One year it’s “value,” another year “quality,” the next, “low volatility.”
That’s why it makes sense for many investors to buy a broad market index fund and call it a day.
In fact, for the past 15 years, owning the market rather than factor picking has been an extremely successful investment approach. The Morningstar US Target Market Exposure Index, the broad gauge of equities from which the factor benchmarks are derived, has posted an average annual gain of 14% for the trailing 15-year period through 2024’s third quarter. That’s well above historical trend and better than only two factor indexes—momentum and quality.
The future could look different, of course. The Periodic Table shows that factor leadership is changeable. In years like 2016 and 2022, most factors individually outperformed the market, and investors wonder why their portfolios don’t tilt toward value, size, or low volatility. We even had a factor flip-flop in 2024’s third quarter, when market leadership rotated. October saw a reversion to trend, meaning momentum and quality regained their familiar leadership positions.
So should investors consider factors when building or rebalancing their portfolios—or tactically tilt their portfolios toward particular factors and away from others? Here’s what to consider.