The Q2 Factor Winner? Small Cap.

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1 The Q2 Factor Winner? Small Cap. July 23, 2018 by Nick Kalivas of Invesco As global risks grow, factor diversification may help investors stay prepared With fears of a trade war looming over global large-cap stocks, the small-cap factor emerged as the clear winner of the second quarter. Specifically, small-cap low volatility/high dividend was the bestperforming factor, followed by the small-cap versions of value, growth, equal weight and momentum (see the chart below for the indexes that represent these factors). Factor dispersion was wide during quarter, with the top performer returning 10.91% and the bottom performer losing 1.58%. This illustrates that factors provide differentiated return and risk profiles from each other, as well as from market-cap-based indexes. Key takeaways Small-cap low volatility/high dividend was able to generate excess return due its selection in consumer staples and general exposures to real estate and industrials. Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.

2 The small-cap sector likely benefited from trade tensions (as smaller companies tend to generate less of their earnings from overseas) as well as upward profit growth revisions linked to the 2017 tax reform legislation (second-quarter earnings per share estimates rose 5.98% for the S&P 600 Index versus 2.10% for the S&P 500 Index 1). In the large-cap space, the growth, momentum, low volatility and high dividend factors all outperformed the S&P 500 Index, while value and high beta struggled. Value strategies were pressured in part by lack of exposure to technology (which outperformed) and overweights to financials (which were pressured by the flatter yield curve). Additionally, selection was poor in the consumer discretionary sector, where growth stocks were in favor. High beta struggled despite positive returns for the S&P 500 Index. Poor selection in industrials, information technology and financials accounted for the relative weakness, offsetting the positive exposures to energy and materials and the underweight to consumer staples. Factor returns: Small-cap factors top the list for the second quarter Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.

3 Factor Index Q H 2018 Small-cap low vol/high div S&P SmallCap 600 Low Volatility High Dividend Index (TR) 10.91% 5.98% Small-cap value Russell 2000 Pure Value Index 10.75% 5.67% Small-cap pure value S&P Small Cap 600 Pure Value Index (TR) 10.67% 6.80% Small-cap growth Russell 2000 Pure Growth Index 10.64% 14.34% Small-cap pure growth S&P Small Cap 600 Pure Growth Index (TR) 10.54% 11.96% Small-cap equal weight S&P SmallCap 600 Equal Weight Index 10.12% 9.73% Small-cap momentum Dorsey Wright SmallCap Technical Leaders Index 8.88% 11.23% S&P 600 Index S&P SmallCap 600 Index 8.77% 9.39% Fundamental mid-small FTSE RAFI US 1500 Mid Small Index 8.49% 7.72% Small-cap low volatility S&P SmallCap 600 Low Volatility Index 7.98% 5.45% Mid-cap growth Russell Midcap Pure Growth Index 7.53% 15.34% Large-cap growth Russell Top 200 Pure Growth Index 7.37% 12.37% Large-cap growth Nasdaq-100 Index 7.27% 10.65% Mid-cap equal weight S&P MidCap 400 Equal Weight Index 5.81% 4.01% Multi-factor large growth Dynamic Large Cap Growth Intellidex Index 5.59% 9.09% Mid-cap low volatility S&P MidCap 400 Low Volatility Index 5.52% 4.57% Multi-factor broad Dynamic Market Intellidex Index 5.30% 7.12% S&P 500 momentum S&P 500 Momentum Index (US dollar gross TR) 5.29% 8.86% Momentum mid large Dorsey Wright Technical Leaders Index 5.25% 7.25% Large-cap low vol/high div S&P 500 Low Volatility High Dividend Index 5.12% -1.14% Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.

4 Large-cap pure growth S&P 500 Pure Growth Index (TR) 4.71% 9.78% Large-cap equal weight Russell 1000 Equal Weight Index 4.49% 2.84% Dividend growth NASDAQ US Dividend Achievers 50 Index 4.43% 1.00% S&P 400 Index S&P MidCap 400 Index 4.29% 3.49% Low beta equal weight Russell 1000 Low Beta Equal Weight Index (TR) 3.98% 2.76% Sector rotation Dorsey Wright Sector 4 Total Return Index 3.82% 5.04% S&P 500 Index S&P 500 Index 3.43% 2.65% Mid-cap value Russell Midcap Pure Value Index 3.39% 0.17% Fundamental large FTSE RAFI US 1000 Index 2.86% 0.36% S&P 500 equal weight S&P 500 Equal Weight Index 2.80% 1.77% Large-cap minimum variance S&P 500 Minimum Volatility Index (net TR) 2.59% 0.49% Large-cap pure value S&P 500 Pure Value Index (TR) 2.37% 0.34% S&P 100 equal weight S&P 100 Equal Weight Index 2.36% -0.02% Large-cap dividend Dow Jones Industrial Average Yield Weighted Index (TR)2.35% -0.38% High beta S&P 500 High Beta Index 1.78% 2.23% Large-cap low volatility S&P 500 Low Volatility Index 1.59% 0.71% Large-cap value Russell Top 200 Pure Value Index 1.24% -0.79% Large-cap quality S&P 500 Quality Index 1.01% -0.48% Low volatility/rising rate S&P 500 Low Volatility Rate Response Index 0.62% 0.94% S&P 500 value S&P 500 Enhanced Value Index 0.53% -2.15% Buyback NASDAQ US BuyBack Achievers Index 0.34% -3.07% Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.

5 Value & momentum S&P 500 Value Momentum Index -1.44% -2.48% Multi-factor large value Dynamic Large Cap Value Intellidex Index -1.58% -6.90% Dispersion in factor returns 12.49% 12.88% Source: Bloomberg L.P. as of June 30, Past performance is not a guarantee of future results. It is not possible to invest directly into an index. Looking ahead: Factor outlook The equity market faces heavy cross currents due to trade tensions, the deleveraging of the Chinese economy, and strong US economic growth. Moreover, politics is creating potential storm clouds with upcoming US mid-term elections and the immigration issue shaking the political backdrop in Italy and Germany, threatening eurozone unity. Using the ISM Manufacturing Index as an indicator of the profit cycle, I believe the US equity market appears to be near the peak of the growth cycle and may begin to decline in The state of the cycle, coupled with low correlations, argues for continued strength in the growth and momentum factors, in my view. Likewise, small-cap factors could continue to benefit from reduced exposure to overseas economic and political risks. Looking forward, I believe that if strong economic growth continues, this should favor the growth and momentum factors. However, rising risks may argue for factor diversification. Specifically, if the economy slows, I would expect large-cap low volatility, low volatility/high dividend, and quality to become more attractive. Learn more about factor investing with Invesco ETFs. 1 Source: Bloomberg, L.P., as of June 30, 2018 Nick Kalivas Senior Equity Product Strategist Nick Kalivas is a Senior Equity Product Strategist representing Invesco s exchange-traded funds (ETFs). In this role, Mr. Kalivas works on researching, developing product-specific strategies and creating thought leadership to position and promote the smart beta equity line up. Prior to joining Invesco, Mr. Kalivas spent the majority of his career in the futures industry, delivering research, strategy and market intelligence to institutional and high net worth clients centered in the equity and interest rate markets. He was a featured contributor for the Chicago Mercantile Exchange, and provided research services to a New York-based global macro commodity trading advisor where he supplied insight on equities, fixed income, foreign exchange and commodities. Nick has been quoted in the Wall Street Journal, Financial Times, Reuters, New York Times and by the Associated Press, and Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.

6 has made numerous appearances on CNBC and Bloomberg. Mr. Kalivas has a BBA in accounting and finance from the University of Wisconsin Madison and an MBA from the University of Chicago Booth School of Business with concentrations in economics, finance, and statistics. He holds the Series 7 and Series 63 registrations. Important information Blog header image: son Photo/Shutterstock.com Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes. Diversification does not ensure a profit or eliminate the risk of loss. Low volatility cannot be guaranteed. Momentum style of investing is subject to the risk that the securities may be more volatile than the market as a whole, or that returns on securities that have previously exhibited price momentum are less than returns on other styles of investing. Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale. Investing in securities of large-cap companies may involve less risk than is customarily associated with investing in stocks of smaller companies. A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets. About the indexes The S&P SmallCap 600 Low Volatility High Dividend Index seeks to measure the performance of the 60 least-volatile high dividend-yielding stocks in the S&P SmallCap 600 Index. The Russell 2000 Pure Value Index is composed of securities with strong value characteristics selected from the Russell 2000 Index. Securities are weighted based on their style score. The S&P SmallCap 600 Pure Value Index measures the performance of securities that exhibit strong value characteristics in the S&P SmallCap 600 Index. Value is measured by the following risk factors: book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio. The Russell 2000 Pure Growth Index is composed of securities with strong growth characteristics selected from the Russell 2000 Index. Securities are weighted based on their style score. Page 6, 2018 Advisor Perspectives, Inc. All rights reserved.

7 The S&P SmallCap 600 Pure Growth Index measures the performance of securities that exhibit strong growth characteristics in the S&P SmallCap 600 Index. Growth is measured by the following risk factors: sales growth, earnings change to price and momentum. The S&P SmallCap 600 Equal Weight Index equally weights small-cap securities in the S&P SmallCap 600 Index. The Dorsey Wright SmallCap Technical Leaders Index includes securities pursuant to a Dorsey, Wright & Associates, LLC proprietary selection methodology that is designed to identify companies that demonstrate powerful relative strength characteristics. Approximately 200 companies are selected for inclusion from a small-cap universe of approximately 2,000 of the smallest US companies selected from a broader set of 3,000 companies. The S&P SmallCap 600 Index is a market-value-weighted index that consists of 600 small-cap US stocks chosen for market size, liquidity and industry group representation. The FTSE RAFI US 1500 Small-Mid Index is designed to track the performance of small and mediumsized US companies. Companies are selected based on the following four fundamental measures of size: book value, cash flow, sales and dividends. Each of the equities with a fundamental weight ranking of 1,001 to 2,500 is then selected and assigned a weight equal to its fundamental weight. The S&P SmallCap 600 Low Volatility Index consists of 120 out of 600 small-capitalization range securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. The Russell Midcap Pure Growth Index is composed of securities with strong growth characteristics selected from the Russell Midcap Index. Securities are weighted based on their style score. The Russell Top 200 Pure Growth Index is composed of securities with strong growth characteristics selected from the Russell Top 200 Index. Securities are weighted based on their style score. The Nasdaq-100 Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The S&P MidCap 400 Equal Weight Index equally weights mid-cap securities in the S&P MidCap 400 Index. The Dynamic Large Cap Growth Intellidex Index seeks to provide capital appreciation while maintaining consistent stylistically accurate exposure. The Style Intellidexes apply a rigorous 10-factor style isolation process to objectively segregate companies into their appropriate investment style and size universe. The S&P MidCap 400 Low Volatility Index consists of 80 out of 400 medium-capitalization range securities from the S&P MidCap 400 Index with the lowest realized volatility over the past 12 months. The Dynamic Market Intellidex Index seeks to identify and select companies from the US marketplace Page 7, 2018 Advisor Perspectives, Inc. All rights reserved.

8 with superior risk-return profiles. The S&P 500 Momentum Index is designed to measure the performance of securities in the S&P 500 Index universe that exhibit persistence in their relative performance. The Dorsey Wright Technical Leaders Index includes approximately 100 US companies from a broad mid- and large-capitalization universe. The index is constructed pursuant to Dorsey, Wright & Associates, LLC s proprietary methodology, which takes into account, among other factors, the performance of each of the approximately 1,000 largest companies in the eligible universe as compared to a benchmark index, and the relative performance of industry sectors and sub-sectors. The S&P 500 Low Volatility High Dividend Index is composed of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. The S&P 500 Pure Growth Index measures the performance of securities that exhibit strong growth characteristics in the S&P 500 Index. Growth is measured by the following risk factors: sales growth, earnings change to price and momentum. The Russell 1000 Equal Weight Index captures the risk and return performance of an equal weight investment strategy for US large-cap stocks. The NASDAQ US Dividend Achievers 50 Index is composed of 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends. The S&P MidCap 400 Index is an unmanaged index considered representative of mid-sized US companies. The Russell 1000 Low Beta Equal Weight Index tracks US large-cap stocks that exhibit low beta, with all index constituents weighted equally within the index. The Dorsey Wright Sector 4 Total Return Index selects up to four exchange-traded funds from the PowerShares DWA Momentum Sector lineup of ETFs with the objective of gaining exposure to the strongest relative strength sectors in the US equity space on a monthly basis. The Russell Midcap Pure Value Index is composed of securities with strong value characteristics selected from the Russell Midcap Index. Securities are weighted based on their style score. The FTSE RAFI US 1000 Index is designed to track the performance of the largest US equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The 1,000 equities with the highest fundamental strength are weighted by their fundamental scores. The S&P 500 Equal Weight Index equally weights the stocks in the S&P 500 Index. The S&P 500 Minimum Volatility Index employs a managed-volatility methodology that seeks to Page 8, 2018 Advisor Perspectives, Inc. All rights reserved.

9 achieve lower total risk than the S&P 500 Index, while maintaining similar characteristics. Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations over time. The S&P 500 Pure Value Index measures the performance of securities that exhibit strong value characteristics in the S&P 500 Index. Value is measured by the following risk factors: book value-toprice ratio, earnings-to-price ratio and sales-to-price ratio. The S&P 100 Equal Weight Index equally weights 100 major blue-chip companies across multiple industry groups in the S&P 500 Index. The Dow Jones Industrial Average Yield Weighted Index is designed to provide exposure to highyielding equity securities in the Dow Jones Industrial Average by their 12-month dividend yield over the prior 12 months. Only securities with consistent dividend payments over the previous 12 months are included in the index. The index is computed using the gross total return, which reflects dividends paid. The S&P 500 High Beta Index consists of the 100 stocks from the S&P 500 Index with the highest sensitivity to market movements, or beta, over the past 12 months. Beta is a measure of relative risk and is the rate of change of a security s price. The S&P 500 Low Volatility Index consists of the 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months. The Russell Top 200 Pure Value Index is composed of securities with strong value characteristics selected from the Russell Top 200 Index. Securities are weighted based on their style score. The S&P 500 Quality Index screens holdings based on three fundamental measures of quality profitability, earnings quality and financial robustness which help to assess a company s potential future profitability, as well as the financial risk each company faces. The S&P 500 Low Volatility Rate Response Index is designed to measure the performance of the top 100 companies of the S&P 500 Index that have exhibited low volatility and are less sensitive to changes in interest rates. The S&P 500 Enhanced Value Index is designed to measure the performance of the top 100 stocks in the S&P 500 Index with attractive valuations based on value scores calculated using three fundamental measures: book value-to-price, earnings-to-price and sales-to-price. The NASDAQ US BuyBack Achievers Index is designed to track the performance of companies that meet the requirements to be classified as BuyBack Achievers. It is composed of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The S&P 500 High Momentum Value Index tracks the performance of stocks in the S&P 500 Index that have the highest value and momentum score. Constituents are selected through a two-step Page 9, 2018 Advisor Perspectives, Inc. All rights reserved.

10 process: first, the 200 stocks with the highest value scores; second, 100 securities with the highest positive momentum scores. The Dynamic Large Cap Value Intellidex Index is designed to provide capital appreciation while maintaining consistent stylistically accurate exposure. The Style Intellidexes apply a rigorous 10-factor style isolation process to objectively segregate companies into their appropriate investment style and size universe. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd. s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd Invesco Ltd. All rights reserved. The Q2 factor winner? Small cap. by Invesco Page 10, 2018 Advisor Perspectives, Inc. All rights reserved.