Factor-based investing has gained traction in our industry in recent years. More firms seem to be offering factor-based strategies, and a host of factor-based ETFs have cropped up. Amid the factor "hoopla," we think it makes sense to take a step back and shed some light on what factor investing is really about: What is a factor? Why does this approach make sense? What research is there to support it?
The short video below addresses some off these key questions. Highlights include the following:
- At its core, factor-based investing is a way to look below the surface when analyzing stocks-to essentially uncover their "DNA."
- To extend this analogy, research has found that certain security "chromosomes and genes" (factors) are associated with long-term investment outperformance.
- Some examples of rewarded factors include size (small cap), value, and momentum.
- Multi-factor investing seeks to identify and assemble portfolios of securities that possess these rewarded factors and assemble them in such a way as to optimize long-term, risk-adjusted portfolio performance.
As factor investing enjoys the spotlight, we hope this video shines a light on the approach itself in a way that is informative and helpful to those considering factor-based strategies for themselves or their clients.
For more information about the basics of multi-factor investing, see my article, A Third Way: Quantitative Multi-Factor Investing Explained.
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