What is Factor Investing?

The ideas behind factors aren’t new. But their use is being enhanced by data and technology.

What are factors?

Factors are the foundation of portfolios—the broad, persistent forces that have driven returns of stocks, bonds and other assets. Factor investing leverages advancements in today’s data and technology to deliberately seek these historical return drivers in portfolios. Understanding how factors work can help you capture their potential for excess return and reduced risk, just as leading institutional investors and active fund managers have done for decades.

Types of factors

There are two main types of factors that have driven returns: macroeconomic factors, which capture broad risks across asset classes; and style factors, which help to explain returns and risk within asset classes.

Macroeconomic factors

Economic growth

Exposure to the business cycle

Real rates

The risk of interest-rate movements

Inflation

Exposure to changes in prices

Credit

Default risk from lending to companies

Emerging markets

Political and sovereign risks

Liquidity

Holding illiquid assets

Style factors

Value

Stocks discounted relative to their fundamentals

Minimum volatility

Stable, lower-risk stocks

Momentum

Stocks with upward price trends

Quality

Financially healthy companies

Size

Smaller, high-growth companies

Carry

Income incentive to hold riskier securities

Factors have generally had low correlations with each other and therefore tended to perform well at different parts of the economic cycle. Use our interactive tool to see how different factors have performed through market shocks, expansions and contractions over the long term.

Factor performance tool

Why invest in factors

Institutional investors and active managers have been using factors to manage portfolios for decades. Today, data and technology have democratized factor investing to give all investors access to these historically persistent drivers of return.

Factors can help meet portfolio objectives

Seek to outperform

Certain single- or multifactor strategies can help provide above-market returns.

Manage risk

Minimum volatility strategies aim for below-market risk.

Enhance diversification

Allocating across macro factors enables investors to seek greater portfolio diversification.

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Pursue investment outcomes with factors