Factor Investing

Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Security characteristics that may be included in a factor-based approach include size, low-volatility, value, momentum, asset growth, profitability, leverage, term and carry.


There are two main types of factors: macroeconomic and style. Investing in factors can help improve portfolio outcomes, reduce volatility and enhance diversification.

KEY TAKEAWAYS


  • Factor investing utilizes multiple factors, including macroeconomic as well as fundamental and statistical, are used to analyze and explain asset prices and build an investment strategy.

  • Factors that have been identified by investors include growth vs. value; market capitalization; credit rating; and stock price volatility - among several others.

  • Smart beta is a common application of a factor investing strategy.




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