Slicing and dicing the US equity market into factor buckets is, at its core, an effort to enhance return by engineering more control over risk management. A key part of this framework is recognizing that risk and return for the stock market overall is a byproduct of multiple factors, such as shares trading at low valuations or posting strong price momentum in the recent past. In turn, it’s reasonable to assume that a set of factor ETFs will exhibit relatively low correlations with one another, offering a degree of diversification otherwise unavailable via standard portfolio designs for capturing equity beta. To test that assumption, let’s review the return correlations for a broad set of factor ETFs in recent history.
For this test we’ll review numbers for a dozen factor ETFs plus a proxy for the broad market beta: