Factor investing focuses on measurable traits that influence how stocks, bonds, or other assets behave. Instead of selecting investments based purely on industry or company size, investors choose assets based on factors such as value, size, momentum, quality, or volatility. These factors are supported by long-term research showing they tend to affect performance in consistent ways.
For example, value stocks are often priced lower relative to their fundamentals, while momentum stocks have been rising in price more quickly. Quality factors look for companies with strong profits and stable balance sheets. Each factor captures a different pattern of market behavior, allowing investors to design portfolios based on goals like growth, stability, or risk reduction.
Factor investing can be used in both active and passive strategies. Many ETFs and index products track specific factors, making the approach accessible to retail and institutional investors. Investors may combine multiple factors to create balanced portfolios that aim for strong long-term results.
Factor investing helps investors understand what drives returns and gives them a structured way to build portfolios using proven, research-backed characteristics.
Investors choose factors based on their goals, risk tolerance, and investment horizon. For example, value and size factors may appeal to long-term investors looking for higher returns, while low-volatility and quality factors may suit investors focused on stability. Many investors use multiple factors to reduce reliance on any single pattern. Backtesting and long-term research also guide factor selection.
Traditional stock picking focuses on individual companies, while factor investing focuses on characteristics shared across many companies. This allows investors to follow systematic rules instead of subjective judgment. Because factors are measurable and tested over decades, they provide a more data-driven approach. The strategy reduces emotional decision-making and can be easier to scale.
Each factor performs differently depending on economic cycles. For example, value may do well after market downturns, while momentum may lead during strong trend periods. Economic growth, interest rates, and market sentiment all influence which factors outperform. This variation is why investors often combine several factors to smooth out performance across cycles.
An investor chooses a “quality” factor ETF that focuses on companies with consistent earnings, strong balance sheets, and low debt. This gives the investor exposure to stable businesses without needing to analyze each company individually.
