Factor Performance 2025: Value in Focus

The data show that the value factor delivered the strongest performance in 2025. The controlled Pure Value strategy generated an excess return of a good 6 percent versus the global equity market, while the Value Index strategy achieved an excess return of as much as around 15 percent. A Pure Momentum strategy also delivered outperformance, although this was significantly lower than for value. The Quality, Low Risk and Size factor indices underperformed the global benchmark. Low Risk index strategies in particular disappointed, with underperformance of almost 9 percent.
 

Drivers of Value Outperformance

Strong value performance combined with a weak Low Risk factor is typical of a procyclical market environment, often associated with the beginning of an economic upswing. In the major developed economies, inflation moved closer to the two percent mark in 2025. This allowed the major central banks to implement moderate interest rate cuts, contributing to a normalisation of financing conditions. At the same time, the global economy proved robust without showing signs of overheating.

Value stocks are particularly sensitive to such phases: many come from cyclical sectors such as industrials, financials or commodities, where earnings expectations tend to rise disproportionately as the growth environment improves. As these stocks had often previously traded at valuation discounts, their share prices responded particularly strongly to renewed investor confidence. In addition, growing scepticism in the second half of the year toward highly valued technology and AI stocks supported a rotation into companies with solid fundamentals — a development from which value strategies benefited disproportionately.
 

Pure versus Index: The Impact of Country Weights

These fundamental drivers, however, do not explain the large return differential — 6 versus 15 percent — between the Pure Value strategy and the Value Index strategy. A significant part of this gap can be attributed to structural side effects in the index strategy, first and foremost country weights. Uncontrolled value strategies invest where absolute valuation levels are most attractive — and structurally speaking, this is less often the US.

While US equities account for more than 70 percent of the global benchmark, their share in the Value Index strategy is only around 43 percent. The sector exposure, by contrast, is similar to the global benchmark. The reason is that the US market systematically trades at higher valuation levels, which means it is often underrepresented in purely traditional value indices.

In 2025, this underweight proved to be a significant performance driver. European equity markets clearly outperformed US markets over the course of the year, as shown in Figure 1. While Europe outperformed the global market by almost 12 percent, the US index lagged by 2.5 percent. The gap widened particularly from February and March 2025 onwards, when a combination of geopolitical uncertainty and fading AI euphoria favoured European stocks. This effect was reinforced by the weak US dollar: the depreciation of the USD against the euro made US investments more expensive for European investors and at the same time increased the attractiveness of European equities. As Value Index strategies structurally overweight Europe and underweight the US accordingly, they automatically benefited from this market shift.

This effect is clearly visible in the performance path of the two value strategies, as shown in Figure 2. While the Pure Value strategy shows a steady, moderate upward trend, the Value Index strategy rises much more sharply from spring 2025 onwards — in line with the outperformance of European markets. In the second half of the year, the actual value factor premium then came into play, supporting both the Pure Value strategy and the Value Index strategy. By year-end, the gap between the two approaches stood at around 9 percentage points.

It therefore seems reasonable to conclude that the higher return of the Value Index strategy was, to a significant extent, not attributable to the value factor itself, but rather to a structural overweight in European markets. Investors who relied on uncontrolled value ETFs benefited in 2025, but in doing so they also implicitly bet on the outperformance of European markets. In a US-friendly market environment, the same structural underweight would have weighed on the strategy accordingly.

A look at the historical performance of both approaches since 2020 confirms this clearly: the lack of neutralisation of country, sector and factor influences in the Value Index strategy led to weaker overall performance and higher volatility, as shown in Figure 3 — not least due to the strength of the US market over this period.
 

For Capital Market Investors

2025 was a good year for equities and at the same time marked a turning point versus 2024: value replaced momentum and the dominant US mega caps as the leading performance driver. This development was supported by a procyclical environment with falling inflation, moderate interest rate cuts and growing scepticism toward highly valued technology stocks.

The return differential between Pure Value and Value Index strategies also shows that structural side effects such as country biases can overshadow the actual factor premium. Investors seeking to capture factor premia in a targeted manner should neutralise structural side effects through active risk control rather than leaving them to chance.

Daniel Jakubowski, Sebastian Schmider