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How The Pandemic Continues to Shape Factor Performance

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Factor investing has been on the rise in recent years, as more investors are looking to target characteristics that explain market returns. The increased focus on factors has many investors wondering how the pandemic has shaped factor performance—and which factors are faring best in 2021.

On a recent episode of our Funds in Focus podcast, we spoke with Senior Investment Strategist Chris Huemmer about which factors are off to a good start in 2021, and got his perspective on how investors can approach factor investing in their portfolios.

In this episode, you'll learn

  • How to identify factors that fluctuate ETFs
  • How to use different factors
  • Insight on what factors performed well from 2020 to the first quarter of 2021


Simply put, factors are systematic¹ drivers of excess returns. Research demonstrates that certain factors have historically helped explain the incremental returns beyond what the market delivers: value, size, momentum, quality, dividend yield, and low volatility. 

While each of these factors has been shown to deliver statistically significant returns over time, it’s important to understand that each factor has a unique cycle where there could be prolonged periods of underperformance. This is why it’s essential to approach factor investing with thorough research—and why it can be particularly challenging to implement a strategy that successfully times factor performance. Exhibit below summarizes the results.


When the US market rebounded after the initial March 2020 pandemic-driven downturn, investors flocked to growth stocks—particularly those related to the new work-from-home environment. Value stocks were dealt a sharper blow at the onset of the crisis and continued to lag growth stocks throughout the year. The energy, financial, and real estate sectors—all of which tend to be heavily weighted in value strategies—were all noteworthy underperformers in 2020.

With the prospect of an economic recovery on the horizon, these trends have reversed in 2021. There’s been a broad repricing where US companies undervalued during the pandemic have now reverted to the mean, and the sectors that fared poorly in 2020 have rebounded in the first quarter of 2021.

The size factor has also been a strong performer in the US this year, extending its late 2020 rally into 2021. Quality has started to outperform as well over the last month of the quarter as investors have started to place greater emphasis on the financial health of a company in addition to its valuation².

For Q1 2021, the top quintile if the MSCI World ex-US Index has outperformed the bottom quintile of value (+10.4% of excess return,) size (+1.4%) and dividend yield (+10.1%.) In the MSCI Emerging Markets Index, the top quintile has outperformed the bottom quintile in value (10.3%,) size (+2.8%) and dividend yield (+12.4%.)


With the value and size factors off to a strong start this year, we’ve had many conversations with clients about our Factor Tilt ETFs. The funds incorporate both value and size into their methodology by adjusting the weights of the investable stock universe—as defined by Morningstar—such that there’s an incremental increase in the weight of smaller and undervalued companies. The approach classifies companies into market capitalization bands, and then uses five valuation metrics to value companies within each band.

The result of this methodology is ETFs covering US, developed, and emerging markets that offer prolonged factor exposure for a core allocation—without introducing the risk and complexity of timing factor performance.

Please see our FlexShares Morningstar® U.S. Market Factor Tilt Index Fund (TILT), FlexShares Morningstar® Developed Markets ex-U.S. Market Factor Tilt Index Fund (TLTD), and FlexShares Morningstar® Emerging Markets Market Factor Tilt Index Fund (TLTE)for more information on our Factor Tilt ETFs.

1 Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance.

² For Q1 2021, the Russell 2000 has outperformed the Russell 1000 by 6.79%.


Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting Read the prospectus carefully before you invest.

Foreside Fund Services, LLC, distributor.

An investment in FlexShares is subject to numerous risks, including possible loss of principal. Fund returns may not match the return of the respective indexes. A full description of risks is in the prospectus.

FlexShares Morningstar® U.S. Market Factor Tilt Index Fund (TILT) is passively managed and uses a representative sampling strategy to track its underlying index. Use of a representative sampling strategy creates tracking risk where the Fund’s performance could vary substantially from the performance of the underlying index along with the risk of high portfolio turnover. It is subject to concentration risk. The Fund's investments are concentrated in the securities of issuers in a particular market, industry, sector or asset class. The Fund may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, sector or asset class. The Fund may also invest in derivative instruments. Changes in the value of the derivative may not correlate with the underlying asset, rate or index and the Fund could lose more than the principal amount invested.

The Morningstar® U.S. Market Factor Tilt Index is the intellectual property (including registered trademarks) of Morningstar® and/or its licensors ("Licensors"), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar® and its Licensors and neither of the Licensors shall have any liability with respect thereto.

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