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Third Quarter Factor Update

Q3 factor returns were greater and divergent from the first two quarters


The factor environment in our small cap universe was quite different from the first two quarters of the year.


Through the end of September, Value has the best year-to-date performance, with a spread of 11%. This means the average return of the most attractively valued stocks (Decile 1) outperformed the average return of the least attractively valued (Decile 10) by 11%. After the March and June quarters, Value was negative. The strong year-to-date return was entirely captured during August and September (read Value Has A Pulse). Those two months alone produced a third quarter return of 15% (see second chart below).


Small cap factor returns - YTD - 2023

Source: S&P Global, Jackson Creek


Volatility, which had been the leading factor, is now the worst performing one. For the first nine months of 2023, Volatility’s spread is -3.93%. Similar to Value, Volatility’s path was not linear. Volatility spiked early in the year (read Role Reversal) but ended Q1 slightly negative. It was the best performing factor through the first half of the year (read Halftime Update). Volatility also experienced a strong reversal in Q3 that was largely a result of August and September performance.


Small cap factor returns - Momentum, Size, Value, Volatility - by quarter; 2023

Source: S&P Global, Jackson Creek


Another development has been the positive trend for Size. Within the small cap universe, the largest capitalization stocks outperformed the smallest by 6.1% as of the end of September.


Size and Volatility have had an inverse relationship throughout the year. In fact, Volatility has been negatively correlated with each of the other four factors, although the most robust inverse relationship is with Size. This can be interpreted as larger companies have also ranked lower on Volatility. Below is a matrix depicting the correlation coefficients between each factor. We see that Volatility and Size are negatively correlated with a -0.52 coefficient. This is based on daily data for 2023.


Matrix of correlation coefficients between Value, Medium-term momentum, Short-term momentum, Size, and Volatility
Factor Correlation Matrix

Finally, here is the cumulative daily path of each of our five key factors for the year.


2023 YTD factor returns for Momentum, Size, Value, Volatility

Source: S&P Global, Jackson Creek


Bonus: Similar to previous posts, here is the above chart with years 2019-23.


YTD Factor returns - Jan to Sep - for Value, Momentum, Size, and Volatility; 2019-2023

Source: S&P Global, Jackson Creek

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