equirus-logo

Factor Investing

Factor Investing.webp

Key Highlights

  • Factor investing is a structured investment approach that focuses on selecting securities based on particular attributes- or "factors"- that have historically been linked to driving asset returns.

  • Factors are grouped into two main categories which are style and macroeconomic factors.

What is Factor Investing?

Factor investing is a structured investment approach that focuses on selecting securities based on particular attributes- or "factors"- that have historically been linked to driving asset returns. These factors, such as company size, value, momentum, quality, and low volatility, help explain variations in performance across securities.

Key Features

Factors are grouped into two main categories:

  • Style Factors: These include value (stocks trading below their intrinsic worth), size (smaller vs. larger companies), momentum (stocks with strong recent performance), quality (companies with strong profitability and stability), and low volatility (stocks with lower price fluctuations). These factors drive differences in returns within an asset class.

  • Macroeconomic Factors: These encompass broader economic influences like inflation, GDP growth, and credit risk, which affect returns across multiple asset classes.

Applications and Benefits

Factor investing provides a systematic and evidence-based method for building investment portfolios. By combining factors with low correlations, investors can achieve diversification, manage risk, and potentially improve returns. It is implemented through active management, quantitative strategies, or smart beta products, making it accessible to both institutional and retail investors. While widely used in equity markets, factor investing is also gaining traction in bonds and commodities.

Why It Matters?

Factor investing provides a structured way to harness persistent drivers of returns, offering investors a powerful tool to optimize portfolios. Its systematic nature and empirical foundation make it a cornerstone of modern investment strategies.