Factor Friday - May 15, 2026

Factor Friday: Defensive Tone Returns as the Rally Slows

The week ending May 15 marked a pivot in factor leadership. The Market factor extended its recovery but at a slower pace, finishing +2.33% versus +4.26% the prior week. Underneath the index, defensive characteristics reasserted themselves: Downside Beta swung from -1.17% last week to +2.14% this week, the largest single-factor reversal of the month. Value held its bid at +1.78%, while Size flipped from +3.18% to -1.02%, indicating that the small-cap leadership that defined April has paused. Momentum remained the persistent laggard at -2.36%, with Liquidity (-0.81%) also negative. Over the trailing four weeks, Market (+6.09%), Value (+3.52%), and Size (+3.37%) still lead, but year-to-date the broader picture remains constructive on defense: Downside Beta is the only factor with a clearly positive YTD print at +4.37%, while Market sits at -18.56%. The takeaway for investors: the index rally is intact, but internal positioning is rotating toward quality and resilience, not toward higher-beta risk taking.

Rolling Factor Rankings and Rotation

The quilt chart frames the leadership change clearly. Market retains the top weekly rank for the third consecutive period, but the lineup behind it has shifted meaningfully. Downside Beta moved from the bottom half last week into second place this week, an unusual move for a factor that typically lags during recoveries. Value, which sat in the middle of the pack through most of April, has now ranked in the top three for two consecutive weeks. Size, by contrast, fell from a top-three slot in April to sixth this week, the sharpest single-week decline in the table.

Month-to-date readings confirm that the May regime differs from April. Market and Value sit one and two for the month, with Size third but losing ground. Momentum is last for the month at -4.71%, extending its weakness. The composition of leadership is rotating away from the small-cap, high-beta trade that propelled April and toward factors that reward fundamentals and downside resilience. For investors, this argues for trimming exposure to the most cyclical pockets of the market and adding to factor sleeves that compensate for adverse conditions.

Market and Key Factor Betas

Market Beta

The high market-beta cohort continues to be populated by speculative and narrative-driven tokens: meme coins, gaming-adjacent assets, AI infrastructure tokens, and L2 scaling plays. These names move 1.5x or more with the broad market and amplify both rallies and drawdowns. At the low end, the composition is dominated by Bitcoin, large-cap proof-of-work assets, and select enterprise or regulatory-themed tokens, all of which provide ballast against systemic moves. The persistence of this dispersion suggests that beta selection remains the primary lever for portfolio construction in this environment.

Downside Beta

The high downside-beta cohort (assets least sensitive to drawdowns) is anchored by established Layer 1s, payment-oriented tokens, and assets with policy or enterprise narratives. The composition is broadly stable week over week, with only modest beta compression at the top of the list. The low downside-beta cohort (assets that amplify market declines) is concentrated in higher-beta L2s, meme coins, and recent narrative tokens; SUI entered the bottom 10 this week, replacing TAO. With Downside Beta now the strongest YTD factor, the practical implication is that mitigating drawdown sensitivity has been the most reliable source of relative return in 2026 so far.

Value

The high value-beta cohort is composed of L1 platforms, DeFi utilities, and select AI and infrastructure tokens where revenue and network usage are visible relative to market cap. TIA and APT entered the top 10 this week, replacing DOT and TRUMP, reflecting a tilt toward modular L1s and execution-layer plays. The low value-beta cohort continues to include ETH, large-cap memes, and select tokens priced for adoption that has yet to materialize. With Value contributing +1.78% this week and +3.52% over the trailing month, the factor is delivering meaningful relative return even as the broad market grinds higher, a constructive sign for fundamental investment frameworks.

What Factors are Driving Markets

Sectors

Total factor contributions over the trailing 30 days summed to 2.53%, against an index cumulative return of 17.61%. The gap of roughly 15.1 percentage points is wider than last week's reading near 9 percentage points, indicating that more of the index move is now driven by idiosyncratic asset-level performance than by systematic factor exposures. Size remained the dominant positive contributor at +3.17%, with Growth (+1.17%) and Momentum (+0.39%) also additive. Downside Beta was the largest drag at -1.64%, with Liquidity (-0.84%) also negative.

Services

Services index factor contributions totaled 4.11% against a 13.22% index return, leaving a gap of approximately 9.1 percentage points. Size again led the contribution at +3.73%, followed by Growth (+1.44%) and Value (+0.86%). Downside Beta (-1.05%) and Momentum (-0.74%) detracted. Services shows a narrower factor-versus-index gap than Sectors, suggesting that systematic exposures continue to explain more of the move within Services constituents.

Settlement

Settlement factor contributions netted to approximately -0.08% against a 7.52% index return, a gap of roughly 7.6 percentage points. Size was the only meaningful drag at -0.10%, with the remaining factors contributing near zero in either direction. Settlement assets, dominated by Bitcoin and other large-cap stores of value, continue to show very low factor sensitivity, consistent with their lower market betas observed earlier in the report.

Appendix: CF Factor Methodology

Market Factor

The market factor captures the broad, systematic risk that permeates the digital asset ecosystem. It reflects aggregate influences such as macroeconomic conditions, investor sentiment, and overall market volatility. As such, this factor is defined by the daily returns of the CF Broad Cap (Free Float Market Cap Weight) Index, offering a comprehensive and capitalization-weighted representation of the asset class.

Size Factor

The size factor captures the return differential associated with asset scale, reflecting the hypothesis that smaller-cap digital assets tend to outperform their larger-cap counterparts. This effect is understood to compensate for elevated operational and financial risks while exploiting potential market inefficiencies. In this framework, the size factor is defined by each asset’s fully diluted market capitalization. The value is sign-inverted so that higher z-scores are assigned to smaller assets and vice-versa.

Value Factor

The value factor reflects a protocol’s ability to generate economic output relative to its capital base and market valuation, combining measures of both efficiency and user engagement. It is constructed as the average z-score of two key ratios: transaction fees relative to total value locked (Fees/TVL) and daily active users relative to market capitalization (DAU/MCap). This composite metric captures how productively a protocol utilizes its resources while also serving as a proxy for user-driven demand. A higher combined score indicates efficient resource utilization and strong user engagement.

Momentum Factor

The momentum factor captures short-term price persistence by identifying assets that have recently exhibited strong performance. It is computed as the average z-score of two metrics: the 2 weeks cumulative performance and the 2 weeks risk-adjusted cumulative performance. This approach aligns with established findings in traditional financial literature and demonstrates empirical relevance in digital assets, where price trends tend to exhibit momentum over short horizons.

Growth Factor

The growth factor captures the expansion of a protocol’s network activity and user adoption. In the context of digital assets, it reflects metrics such as fee generation and user engagement, which serve as indicators of increased platform utilization and operational scale. The factor is defined as the average z-score of 30-day fee growth and 30-day weekly active user growth, thereby identifying assets exhibiting consistent and measurable increases in underlying network usage.

Downside Beta

The downside beta factor captures an asset’s sensitivity to adverse market conditions by isolating its behavior during periods of negative market returns. Empirical evidence shows that assets with lower downside beta tend to outperform their higher-beta counterparts over the long-term, due to their reduced participation in market drawdowns and more stable return profiles during periods of elevated volatility. As such, it is estimated through a regression of the asset’s daily returns over the most recent four-week period against market returns observed exclusively during negative sessions. The resulting value is sign-inverted to ensure that assets with lower downside exposure are assigned higher z-scores.

Liquidity Factor

The liquidity factor captures the ease with which a digital asset can be traded without significantly impacting its price. Empirical evidence shows that illiquid assets tend to command a higher risk premium than their more liquid counterparts, serving as compensation for trading friction and price volatility. To quantify this, the factor is measured using token turnover, defined as trading volume as a percentage of circulating supply. The value is sign-inverted such that higher z-scores are assigned to less liquid assets.

For further detail, view the CF Factors Methodology Document, the CF Factor Data Suite, and Our paper “A Factor Model for Digital Assets” in Springer Nature’s Mathematical Research for Blockchain Economy