{"id":200663,"date":"2024-01-02T11:30:00","date_gmt":"2024-01-02T16:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=200663"},"modified":"2024-01-03T12:55:27","modified_gmt":"2024-01-03T17:55:27","slug":"whats-the-increased-correlation-between-momentum-and-minimum-volatility-mean","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/whats-the-increased-correlation-between-momentum-and-minimum-volatility-mean\/","title":{"rendered":"What&#8217;s the Increased Correlation Between Momentum and Minimum Volatility Mean?"},"content":{"rendered":"\n<ul class=\"wp-block-list\">\n<li><strong>Momentum and Minimum Volatility factors have underperformed the market by the most out of any other factor in 2023.<\/strong><\/li>\n\n\n\n<li><strong>Excess return correlations for Momentum and Minimum Volatility factors spiked this year, deviating from historical low to negative correlations.&nbsp;<\/strong><\/li>\n\n\n\n<li><strong>Strategy design, rebalancing frequency, and prior-year market trends are the likely causes of the increased correlation.<\/strong><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Momentum stocks are typically viewed as higher risk assets that behave differently than lower risk Minimum Volatility exposures. But this year, Momentum and Minimum Volatility are the only ones across the traditional four factors trailing the market by double digits.<sup>1<\/sup>&nbsp;With only a 3% and 5% gain in 2023, they are down 17% and 14%, respectively.<sup>2<\/sup><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As a result, their correlation of excess returns has spiked to an average 71% for all of 2023.<sup>3<\/sup>&nbsp;This compares to a historical excess return correlation of just 9.6%,<sup>4<\/sup>&nbsp;putting this year\u2019s behavior at odds with historical trends and the generalized views of factor frameworks.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Will this correlation continue into 2024?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-momentum-and-minimum-volatility-most-correlated-since-2002\">Momentum and Minimum Volatility Most Correlated Since 2002<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The basic premise of factor investing is that certain factors (Value, Momentum, Quality, and Minimum Volatility) represent premia that can add to returns over a long-term horizon. Yet, cyclical shifts can impact short-term returns, leading to periods of underperformance versus the market.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Factor investing also provides potential diversification opportunities. But when return trends break down as a result of cyclical market shifts, so do the potential diversification benefits. That\u2019s happening now with Momentum and Minimum Volatility exposures.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Using rolling 90-day correlation of 90-day excess returns to the S&amp;P 500 Index (removing outliers and general market beta from two long-only exposures), Momentum and Minimum Volatility stocks have not been this correlated in a calendar year since 2002. The average correlation in 2023 has been 71%, compared to long-term average 9.6% (Figure 1).<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1067\" height=\"493\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111825.png\" alt=\"Figure 1: Momentum and Minimum Volatility Factors Most Correlated in Over 20 Years\" class=\"wp-image-200665 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111825.png 1067w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111825-700x323.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111825-300x139.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111825-768x355.png 768w\" data-sizes=\"(max-width: 1067px) 100vw, 1067px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1067px; aspect-ratio: 1067\/493;\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">The Impact of Factor Construction<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Factor construction (e.g., market neutral, beta neutral, long-only, sector neutral, high capacity versus high concentration) alongside attribute selection (e.g., price-to-book versus price-to-sales for value investors) can lead to different profiles, returns, and relationships to other factors. Yet, the same trend for Momentum and Minimum volatility factors exists even if different construction methodologies are used.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The above MSCI-based Momentum and Minimum Volatility exposures are rebalanced semi-annually and use different descriptors for the intended factor focuses than what the S&amp;P 500 USA Momentum Index and the S&amp;P 500 Low Volatility Index use. The latter of which also rebalances annually.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For those two S&amp;P based factor types, the 2023 average correlation is also 71% versus a long-term average of -2%.<sup>5<\/sup>&nbsp;Point being, the factors\u2019 co-movement is consistent across other factor frameworks.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But the co-movement has begun to rollover and mean revert. The rolling 90-day correlation of 90-day excess returns has declined in the last few weeks and is now below the historical median (Figure 2). The same trend exists if we use the S&amp;P-based factors.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1038\" height=\"555\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111952.png\" alt=\"Correlation trends have begun to wane heading into 2024\" class=\"wp-image-200666 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111952.png 1038w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111952-700x374.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111952-300x160.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111952-768x411.png 768w\" data-sizes=\"(max-width: 1038px) 100vw, 1038px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1038px; aspect-ratio: 1038\/555;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.ssga.com\/us\/en\/institutional\/etfs\/insights\/increased-correlation-of-momentum-and-min-volatility\">Click here to read the full article<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">&#8212;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/www.ssga.com\/us\/en\/institutional\/etfs\/insights\/increased-correlation-of-momentum-and-min-volatility\">What\u2019s the Increased Correlation Between Momentum and Minimum Volatility Mean?<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Footnotes<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><sup>1<\/sup>&nbsp;Value, Quality, Momentum, and Minimum Volatility.<br><sup>2<\/sup>&nbsp;Bloomberg Finance L.P. as of December 11, 2023, based on the S&amp;P 500 Index, MSCI USA Minimum Volatility Index and the MSCI USA Momentum Index.<br><sup>3<\/sup>&nbsp;Bloomberg Finance L.P. as of December 11, 2023, based on the S&amp;P 500 Index, MSCI USA Minimum Volatility Index and the MSCI USA Momentum Index 90-day rolling 90-day excess return correlations.<br><sup>4<\/sup>&nbsp;Bloomberg Finance L.P. as of December 11, 2023, based on the S&amp;P 500 Index, MSCI USA Minimum Volatility Index and the MSCI USA Momentum Index 90-day rolling 90-day excess return correlations.<br><sup>5<\/sup>&nbsp;Bloomberg Finance L.P. as of December 11, 2023, based on the S&amp;P 500 Index, S&amp;P 500 USA Momentum Index and the S&amp;P 500 Low Volatility Index 90-day rolling 90-day excess return correlations.<br><sup>6<\/sup>&nbsp;Bloomberg Finance L.P. as of December 11, 2023, based on the MSCI USA Minimum Volatility Index and the MSCI USA Momentum Index annual holdings from 2013-2023.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Glossary<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>S&amp;P 500 Index<br><\/strong>The S&amp;P 500\u00ae Index is designed to measure the performance of the large-cap segment of the US equity market. It is float-adjusted market capitalization weighted.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>S&amp;P 500\u00ae Momentum<br><\/strong>S&amp;P 500\u00ae Momentum is designed to measure the performance of securities in the S&amp;P 500 universe that exhibit persistence in their relative performance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>S&amp;P 500\u00ae Low Volatility Index<br><\/strong>This S&amp;P 500\u00ae Low Volatility Index consists of the 100 stocks from the S&amp;P 500 Index with the lowest realized volatility over the past 12 months.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>MSCI USA Minimum Volatility Index<br><\/strong>MSCI USA Minimum Volatility Index is designed to reflect the performance of a minimum variance (or managed volatility) equity strategy.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>MSCI USA Momentum Index<br><\/strong>MSCI USA Momentum Index is composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Value<br><\/strong>Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Momentum<br><\/strong>Momentum investing involves going long on stocks, futures, market exchange-traded funds (ETFs), or any financial instrument showing upward-trending prices.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Minimum volatility<br><\/strong>Minimum volatility investing seeks to build a portfolio of stocks that exhibits less variability than the broad market. It aims to provide investors with a smoother ride within equity allocations by creating a portfolio that exhibits less swings \u2014 up or down \u2014 than the market.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Quality<br><\/strong>The quality factor refers to the tendency of high-quality stocks with typically more stable earnings, stronger balance sheets and higher margins to outperform low-quality stocks, over a long-time horizon.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Correlation of Excess Returns<br><\/strong>Applying the same methodology as with a standard correlation coefficient calculation, the correlation of excess returns attempts to indicate linearity in the movement of returns above a given benchmark.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Disclosure<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The views expressed in this material are the views of the SPDR Research and Strategy team through the period ended December 11, 2023, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor&#8217;s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Unless otherwise noted, all data and statistical information were obtained from Bloomberg Finance, L.P. and SSGA as of December 11, 2023. Data in tables have been rounded to whole numbers, except for percentages, which have been rounded to the nearest tenth of a percent.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Investing involves risk including the risk of loss of principal.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Because of their narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA\u2019s express written consent.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Momentum and Minimum Volatility factors have underperformed the market by the most out of any other factor in 2023.<\/p>\n","protected":false},"author":121,"featured_media":200665,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[18,6,8,9,22,26,3],"tags":[1988,12076,2580],"contributors-categories":[13643],"class_list":["post-200663","post","type-post","status-publish","format-standard","has-post-thumbnail","category-macro","category-north-america","category-region","category-securities","category-stocks","category-text-articles","category-traders-insight","tag-correlation","tag-minimum-volatility","tag-momentum","contributors-categories-state-street-global-advisors"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What&#8217;s the Increased Correlation Between Momentum and Minimum Volatility Mean?<\/title>\n<meta name=\"description\" content=\"Momentum and Minimum Volatility factors have underperformed the market by the most out of any other factor in 2023.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.com\/campus\/wp-json\/wp\/v2\/posts\/200663\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What&#039;s the Increased Correlation Between Momentum and Minimum Volatility Mean? | IBKR Campus US\" \/>\n<meta property=\"og:description\" content=\"Momentum and Minimum Volatility factors have underperformed the market by the most out of any other factor in 2023.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/whats-the-increased-correlation-between-momentum-and-minimum-volatility-mean\/\" \/>\n<meta property=\"og:site_name\" content=\"IBKR Campus US\" \/>\n<meta property=\"article:published_time\" content=\"2024-01-02T16:30:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-01-03T17:55:27+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/01\/Screenshot-2024-01-02-111825.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1067\" \/>\n\t<meta property=\"og:image:height\" content=\"493\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Matthew J. 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