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PTR3 Lance Humphrey.jpgBy Lance Humphrey, CFA, Portfolio Manager of Global Multi-Assets


The term “smart beta” is being heard more and more in the stock investing world – in its broadest sense, it refers to an approach to passive investing that doesn’t focus on indexes weighted by market capitalization, such as the Standard & Poor’s 500.


But that broad definition begs the question, “If you don’t use a market-cap-weighted index, what do you use?” And that’s where the basic notion of smart beta opens into a range of alternative stock characteristics, also called “factors,” that over the long term have been successful in managing portfolio risk and/or enhancing returns.

Various factors have different track records in terms of risk and return. In our factor-based investing, we focus on two in particular: value and momentum.


Value: The foundation of value investing is the idea that cheaper assets (i.e., low price-to-earnings or low price-to-book value) will on average outperform expensive in the long term. Value is typically pro-cyclical, meaning it has tended to perform well in periods of economic expansion.


Momentum: The momentum factor is the tendency of well-performing stocks to continue performing well in the near term. Momentum tends to benefit from continued trends in the market and economy.


Over the past four decades, stocks with value and momentum characteristics have on average posted higher annual returns than the overall market.



On the risk side, we believe value and momentum historically have tended to be a little riskier than the other factors, but combining them can help lower that risk. We believe the persistence of excess return and its robustness compensates us for taking on any incremental risk.


Persistence doesn’t mean a strategy based on value and momentum pays off every year – in any given year, either factor can significantly lag the broad-market indexes. Last year, U.S. value was a strong outperformer, but this year it has struggled as investors have focused their attention on growth-oriented stocks. As a result, the P/E ratios of growth stocks have continued to climb ever higher even as their earnings growth has slowed relative to value stocks.


We currently see the best value opportunities in emerging markets, where the valuation spread between value and growth stocks is even wider than in the U.S.


Economic growth is picking up in EMs, which stands to be a positive for beaten-up value stocks. And on the momentum side, history shows that once EM stocks pick up a tailwind, their outperformance often lasts for years.

As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are suited for you based upon your individual goals, objectives, risk tolerance and time horizon.


Investing in securities products involves risk, including possible loss of principal.


Shares of ETFs are bought and sold in the market at a market price, which may differ from NAV. Investors selling ETF shares in the market may receive less than NAV. Investors buying and selling ETF shares at market price may pay brokerage commissions, which will reduce returns. Market returns are based upon the closing price, which is generally at 4:00 p.m. Eastern time and do not represent the returns you would receive if you traded shares at other times. Investors may acquire ETF shares and tender them for redemption in Creation Unit Aggregations only.  Individual ETF shares are not redeemable.


This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisors. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.


Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability. Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies. There may be less publicly available information relating to foreign companies than those in the U.S. Foreign securities may also be subject to foreign taxes. Investments made in emerging market countries may be particularly volatile. Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems.


Standard & Poor’s 500 Index and S&P are registered trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500 focuses on the large cap segment of the market, covering 75% of the U.S. equities market.  S&P 500 is a trademark of the McGraw-Hill Companies, Inc.


Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.


Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment advisor and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.



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