The WSJ has a good article explaining how schizophrenic the tech rally this year has been, with shares of giant tech firms “cropping up everywhere” in the universe of factor-based strats, even contradictory ones. Some examples: “Apple is in five low-volatility ETFs with a collective $14 billion and nine momentum ETFs with $17.7 billion, according to data firm XTF. Alphabet resides in seven low-volatility ETFs and three momentum ETFs, while Microsoft is in 11 low-vol ETFs and four momentum ETFs.”
That’s not all: Apple is also the fourth-largest position in the iShares Quality Factor ETF , which invests in firms with high returns on equity, low debt and stable earnings growth. At the same time, Apple is a large holding in a separate BlackRock ETF that aims to capture momentum, and it is also the top holding in BlackRock’s iShares Edge Value Factor ETF, representing nearly 10% of the portfolio.
While in the past different factors offered different investment styles, and at least superficial diversification, the tech juggernaut has made some of the most popular quant strats virtually overlapping.
This “style creep” means investors holding a mix of seemingly disparate funds in the name of diversification “could be surprised to find heavy concentrations in the same group of in-favor stocks, making them vulnerable in bouts of selling. Rules-based funds and strategies that gradually added tech stocks could sell them in a downturn, adding to price declines.”
The biggest risk may be volatility itself.
This post was published at Zero Hedge on Jun 19, 2017.