Definition
Factor investing systematically captures risk premiums associated with persistent return drivers identified by academic research. Key factors include value (cheap vs expensive), momentum (recent winners), size (small vs large caps), quality (profitable, stable companies), and low volatility. Factor tilts can enhance returns and diversification beyond traditional asset allocation.
lightbulb Example
A factor portfolio overweights stocks with low P/E (value), strong 12-month returns (momentum), and high ROE (quality). Backtesting shows 2-3% annual excess return over market-cap-weighted indices with similar volatility.
verified_user Key Points
- Value, momentum, size, quality, low-vol are primary factors
- Academic research supports long-term factor premiums
- Factors can underperform for extended periods
- Smart beta ETFs provide accessible factor exposure