Factor Investing

Factors form the basis of portfolios – identifiable forces behind the returns of stocks, bonds and other assets.

Factor investing explicitly leverages these factors to capitalize on their potential for returns beyond the cap weighted benchmark with less risk.

Knowing how factors work can help you capitalize on the growing ways to access factor investing and meet your client’s investing goals.

A substantial body of academic literature supports factor performance persistence. Factors persist for rational reasons (premiums are consistent with rational pricing) and behavioral reasons (premiums associated with suboptimal investor behavior).

Identifiable Factors


Stocks with high exposure to the market, or high betas.


Stocks which have lower prices relative to their fundamentals.


Smaller companies that exhibit high growth.


Stocks exhibiting upward price trends.

Low Volatility

Lower risk stocks.


Companies with robust financial indicators.


Identifying a portfolio’s factor exposures might be the most important consideration of all, as investors may be exposed to a range of factors – either explicitly or implicitly. By focusing on factor exposures as a part of the portfolio construction process, investors can gain a better understanding of the drivers of portfolio returns.


Investors wishing to explicitly control their factor exposures might target investments which explicitly track a factor, such as value. Those referring more long-term exposure, less wedded to a specific factor or factors, might use a portfolio that blends and consistently rebalances to a static mix of long-term risk premia.


By allocating directly to factors, rather than indirectly through another active investment vehicle, investors are likely able to invest much more cost effectively (ii., a factor-based ETF or SMA)

Factors are not a new phenomenon – some of the earliest academic evidence dates back to as far as 1961. The multitude of opportunities for investing in factors and vehicles, especially the explosion of factor ETFs, is new.

Learn how Optimal leverages factor returns in their portfolios

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