The Stock Strategies That Are Paying Off in 2025
Plus, how factor investors can position their portfolios for future stock rotations.
Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Investing Insights is helping investors navigate market volatility in a new series. Morningstar strategists and authors will deliver timely insights, trends, and tips. These episodes will pop into your podcast feed at least once a month. This week’s episode focuses on the types of US stocks that are performing better and worse than the broader market in 2025. The investment factors that are leading might surprise you. What can we learn when we look at this year’s factor performance to help you in the long term? Morningstar Indexes strategist and columnist Dan Lefkovitz has researched what’s going on.
Welcome back to the podcast, Dan.
Dan Lefkovitz: Thanks, Ivanna. Good to be here.
What Is Factor Investing?
Hampton: Well, let’s lay the foundation for our conversation. What is factor investing, and how do you define factors?
Lefkovitz: Yeah, so factor investing is about taking bets on certain groupings of stocks with common characteristics. A lot of folks have heard of value investing or tilting toward companies of a smaller size. Those are factors. They have their origins in academic finance, and there are ways of explaining divergence within the market but also identifying sources of superior long-term returns. So, we’ve built a family of Morningstar factor indexes that are aligned with the Morningstar risk model, and we track six of the most commonly accepted factors. So, value, size, yield, low volatility, quality, and momentum, and we define those factors using fairly common ratios and metrics—things like price/earnings, price/sales, price/book for the value factor, for example.
What Factors Have the Strongest Performance Amid Market Volatility in 2025?
Hampton: Well, I know we can say this, but US stock market has been very volatile in 2025. What have you seen when it comes to factor performance this year? Let’s start with the leaders.
Lefkovitz: Obviously, there was a huge selloff in March and especially April after the tariff announcements, and the broad US stock market was down significantly. And one thing we observed was that during that down period, our low-volatility factor index did really well. It held up much, much better than the overall market. Low-volatility stocks—so looking for stocks that have had, their prices have not bounced around that much in the recent past, haven’t seen big price moves—they were up significantly when the overall market was down.
Berkshire Hathaway and Other Low-Volatility Stocks Outperformed During Market Volatility
Hampton: What are some big name stocks from those leading factors that have outperformed this year?
Lefkovitz: If you look at the constituents of our low-volatility factor index, Berkshire Hathaway, that’s a company in which I’ve been a long-term shareholder, that has held up really well as the market went from kind of risk-on mode to risk-off. Other names that have held up well in that low-volatility index: Coca-Cola, Mastercard, Marsh & McLennan.
- Berkshire Hathaway stock value BRK.A BRK.B
- Coca-Cola stock value KO
- Mastercard stock value MA
- Marsh & McLennan Companies stock value MMC
Hampton: And the low-volatility factor focuses on limiting losses, right?
Lefkovitz: Yeah.
Why Lower-Volatility Stocks Help With Capital Preservation in the Long Term
Hampton: Can you talk about what investors should know about this factor’s behavior in the long term?
Lefkovitz: This is a factor that’s not necessarily about producing superior returns to the overall market, it’s about beating the market on a risk-adjusted basis. It’s a factor that really earns its keep in down markets, and that is what we’ve seen from the behavior of our low-volatility factor index. We had a big down year in 2022. Low-volatility stocks held up better than the overall market. 2018 was a down year. That was a previous trade war. That was a good year, relatively speaking, for low-volatility stocks. That pandemic panic at the beginning of 2020, low-volatility stocks were resilient during that period. Now, on the flip side, when there’s a raging bull market, low volatility looks pretty sluggish. So, 2023, 2024, those were big up years, 25% or so for the overall US equity market, thanks to the artificial intelligence enthusiasm. Those were years in which low volatility underperformed.
Which Factors Have Lagged the Broader Stock Market in 2025?
Hampton: What about factors that lagged the broader stock market at different points this year? Talk about those.
Lefkovitz: When the market was down in March and April, we saw the quality factor and the momentum factor underperforming. Quality was a factor that did really well in 2023 and 2024, largely thanks to that AI and tech enthusiasm. Quality stocks, the premise there is that the market underestimates the durability of certain companies’ profits. So, our low volatility, our quality factor index looks for companies that have high profit margins and strong balance sheets. Those stocks came into the year with really high expectations and rich valuations, and they underperformed as the market was selling off.
And then momentum was another one. Now, the momentum factor kind of latches on to whatever’s done well recently, so momentum, our momentum factor index, had a lot of the same quality stocks in it as the quality factor index, and when there’s a change in market direction, when market leadership rotates, that often trips up the momentum factor.
Nvidia and Other Quality Stocks Underperformed During Market Volatility?
Hampton: And which popular stocks underperformed during all this time?
Lefkovitz: So quality-factor-wise, I’d highlight Nvidia, Arista Networks, Alphabet as companies that have really high profit margins and strong balance sheets, came into 2025 with really high expectations and sold off deeper than the market when it was down in March and April.
How Factor Investing’s Performance in 2025 Fits Into Long-Term Trends
Hampton: Well, let’s zoom out on factor investing. What have you seen in recent years, and how does 2025 fit into those longer-term trends?
Lefkovitz: Well, it’s interesting, Ivanna. We used to hear a lot more about factor investing. It was a lot more popular, say, five, even 10-plus years ago. We haven’t heard that much about it in recent years because the overall US equity market has been really, really strong and really hard to beat. Most bets against it haven’t really paid off very well. Only two of our factor indexes have outperformed the overall US equity market over the past 10 years and those are quality and momentum. And quality, it’s really because of the technology-related stocks, the Magnificent Seven, that small cohort of companies that are so profitable and people describe them as winner-take-all or winner-take-most kind of companies. Skeptics would call them monopolists. And even before AI, there was a lot of tech trends that were accelerated by the pandemic that benefited the quality factor. And momentum has won largely by riding the quality wave.
Why Diversification Is Key When Investing in Factors
Hampton: It seems like a lot of people have an opinion about this. So, diversification seems important in factor investing because market conditions change. What if someone as an investor who has not explored factor investing wanted to try this? What would be your suggestions?
Lefkovitz: I think of it as sort of a spectrum. You’ve got your die-hard factor investors, maybe value investors or size-based investors, quality investors, that are just going to stick with their factor and, through thick and thin, ride out all of the cycles of underperformance that are inevitable that come with factor investing. On the other hand, you’ve got people that just want to own a broad market portfolio, don’t want to take factor bets. Maybe they don’t believe in factors. Maybe they don’t want to go through the cycles of underperformance that are inevitable. In the middle is this approach you suggest, which is diversifying by factor. You can pair factors together. Value and momentum is kind of a popular pairing. We also have a multifactor index, which represents sort of a diversified factor-based approach. Now, you could say the overall equity market is a multifactor approach. But our multifactor index maintains equal—or targets, I should say—equal exposure to the six factors through an optimization process. And it does generate a portfolio that looks and acts different to the overall market.
You’re a Factor Investor. You Just May Not Know It Yet
How Often Should Factor Investors Check Their Portfolio?
Hampton: Now, if you’re into factor investing, are you checking regularly? Are you looking at your portfolio quarterly? Or semiannually?
Lefkovitz: Well, that’s a good question. I mean, I think with factors, success is sort of measured in decades, not in years. And, you know, we have this table that we like to show when it comes to factors, just looking at the annual returns, calendar—annual—calendar-ear returns for our factor indexes. And you see that it bounces around a lot. The relative rankings are constantly changing. In one year, low-volatility stocks are the winners. In the next year, it’s momentum. In the next year, it’s quality. And next year, it’s yield. Checking regularly could lead you to buy and sell at the wrong time into factors. I think one of the key takeaways for factor investors is that you really need patience and intestinal fortitude if you want to stick with your factor for the long term.
How to Position a Portfolio for Future Stock Market Rotations
Hampton: So, we talked about someone who may be new to factor investing. Let’s get into someone who’s already engaged in it. How can they position their portfolio for a future rotation?
Lefkovitz: Caveats and warnings need to be issued before answering this question because it’s really difficult to time factors. It’s really hard to know what factors are going to perform when. If you are going to do it, I think valuation needs to be looked at. Valuation is a poor timing signal, because it can take a long time before prices and fair values converge. But I mentioned, in the context of quality, that a lot of quality stocks came into the year richly valued according to Morningstar equity analysts, carrying the burdens of high expectations and that set them up for a fall when the market sold off. It’s often the highest flyers that have the furthest to fall. If I were to be a valuation-based contrarian sort of factor investor, looking forward, I might look at some of the factors that have underperformed over the past 10 years, things like value and size.
Key Takeaways
Hampton: And you mentioned some takeaways earlier from your research. Any more?
Lefkovitz: I would say the logic underpinning factors is often really compelling. There’s often a really strong rationale based in compensation for risk or an investor behavior that might intrigue an investor and lead an investor to take a factor bet going forward and that’s fine. But, as we’ve discussed, you just need to be really, really patient because factors, you know, if you look at the empirical record for factors, it’s over decades. It’s also historical. So, we don’t know. There’s no guarantees about the future. And as I said, you know, year-to-year factor leadership is always changing and you really need to be able to stick with your factor through thick and thin.
Hampton: And you mentioned your colorful table that is in one of your articles. That link is in the show notes, everyone. Check it out. Dan, thank you so much for coming to The Table.
Lefkovitz: Thanks for having me, Ivanna.
Hampton: That wraps up this week’s episode. Thanks for watching and making this show part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor, Morningstar. Take care.
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