Factor investing

Factor investing is an investment approach that targets measurable characteristics of securities, known as factors, which help explain differences in risk and return. Commonly studied equity factors include size, value, momentum, quality, and low volatility. Other characteristics sometimes used in factor-based strategies include asset growth, leverage, term, carry and liquidity.

A factor-based investment strategy typically involves tilting portfolios toward or away from these characteristics in an attempt to capture long-term return premia or reduce downside risk. This can be implemented through quantitative active strategies, multi-factor models, or index-based products such as smart beta exchange-traded funds (ETFs). Factor investing has been documented not only in equities but also in corporate bonds, government bonds, currencies, and commodities.

Critics argue that some factors may reflect statistical data mining, rather than persistent economic effects, that their performance can deteriorate as strategies become crowded, and that trading costs may reduce or eliminate the return premiums.