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.
FACTOR INVESTING WORKS
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).
Savvy investment advisors can differentiate themselves by harvesting these risk premia alongside conventional index strategies.
INVESTING IN FACTORS
Factors are not a new phenomenon – some of the earliest academic evidence dates back as far as 1961. However, what is new is the explosion of ETFs that can be used to build inexpensive and efficient factor-driven portfolios.
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