FACTOR INVESTING
Back to GlossaryDefinition
Tilting portfolios toward characteristics like value, size, momentum, or quality to seek excess returns.
Summary
Factor investing is an investment strategy where portfolios are deliberately adjusted to emphasize certain stock characteristics or 'factors' that have historically produced higher returns than the overall market. Instead of buying a broad market index, investors tilt their portfolios toward stocks with specific traits like being undervalued (value), small companies (size), stocks with upward price momentum, or high-quality companies with strong financials. The goal is to capture risk premiums associated with these factors to achieve returns above what a simple market-cap weighted portfolio would provide.
Usage Context
Understanding factor investing is crucial when studying portfolio construction, evaluating investment strategies beyond traditional market-cap indexing, analyzing ETF and mutual fund offerings, and comprehending how institutional investors seek to enhance returns through systematic approaches.
Common Confusions
- Thinking factor investing guarantees higher returns rather than seeking them
- Confusing factors with sectors or industries
- Believing factor investing is the same as stock picking
- Assuming all factors work all the time
- Thinking factor investing eliminates risk rather than taking on different types of risk
