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For the past 20 years, a multi-factor strategy as targeted by the STOXX Europe 600 Industry Neutral Ax Multi-Factor Index has fared extremely well, and much of that consistent performance can be traced to the benefit of diversifying across different sources of return premia.
Market makers and authorized participants (“APs”) in the primary market for ETF shares often need to hedge exposure to shares of ETFs that they must stand ready to convert into the underlying stocks in a “redeem” trade, or to shares of the underlying they must assemble in a “create” trade. When they deliver/accept the ETF shares to the fund sponsor, they will unwind this hedge. 
January 2022 saw one of the highest levels of market volatility since the COVID-19 crash of March 2020. During those 20 trading days in January, the STOXX® USA 500 Index fell by almost 6%. Looking back, a key question for investors is: did we overlook any hints of what was coming and, had we an inkling, what might we have done about it?
The mood of investors in Q3 2021 was decidedly undecided—and increasingly skeptical. Questions about the strength of the economic recovery, persistent inflationary pressures, the world’s ability to overcome the pandemic, and the timing of any tapering efforts by major central banks kept sentiment on the negative side of the neutral zone.
While the US market has hit multiple record highs in 2021, investor sentiment thus far has been more negative than positive.
The STOXX Industry Neutral Ax Factor Indices were introduced in February and leverage Axioma’s advanced portfolio-construction tools and risk models. They provide a robust choice for investors looking to reduce unintended exposures and access the return of factors.
A new variation of the STOXX Factor Indices, which leverage Axioma’s proven factor models, further restricts sector diversions from the benchmark.
In this note, we present updated results for the STOXX USA 500 version of our ROOF Market Portfolios. These portfolios include a Risk-On and a Risk-Off variant built directly from the ROOF Scores and constituents of the STOXX USA 500 benchmark portfolio, and rebalanced monthly (at month-end) using the as-of-then sector ROOF scores and exposures (i.e., no look-ahead bias). We will focus on the last 12 months, as this period had several turnarounds in sentiment.
Sector ROOF scores in the US show that sentiment has been neutral for two weeks, after an unusually long bullish period. However, investors may return to their bullish outlook driven by fiscal stimulus and continued (seemingly indefinite) Fed action.
Over the past two years, Qontigo’s Applied Research team has released two variants of its sentiment indicator called the ROOFTM Scores.
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