What is factor investing?
Factor investing is an investment approach that involves targeting specific drivers of return across asset classes. Investing in factors can help improve portfolio outcomes, reduce volatility and enhance diversification.
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Key Takeaways
Factors are drivers of returns
Factors are broad, persistent drivers of return that research has proven to be historically enduring.
Factors are economically intuitive
Individual factors tend to outperform at different parts of the economic cycle.
Factors are diversifying
Factors offer differentiated returns and diversification benefits, with low correlations between different factors.
Introduction to factors
Factors are the foundation of investing—broad, persistent drivers of returns across asset classes. Understand how factors work to better capture the potential for excess return and reduced risk, just as investors have done for decades.
Types of factors
There are two main types of factors that have driven returns: macro economic factors, which capture broad risks across asset classes; and style factors, which help to explain returns and risk within asset classes.
Macroeconomic factors capture broad risks that exist across asset classes.
Style factors explain risks and returns within asset classes.
Explore BlackRock's latest factor investing insights
Why choose BlackRock for factor investing?
BlackRock has been at the forefront of factor-based investing for decades and continues to innovate new strategies to help address clients’ investment challenges.
BlackRock offers a variety of ways to implement the time-tested principles of factor investing. These range from Factor ETFs and target date funds, which offer low-cost, efficient access to factors, to multi-factor strategies, that incorporate BlackRock's active insights.
You can also tap into BlackRock's deep experience with factor investing via insights provided by our Head of Factors Investing Strategies, Andrew Ang, or by browsing our online resources and tools designed for investors seeking to access these persistent drivers of return.
Interested in learning more about factor-based strategies?
Discover how we can help you access historically persistent drivers of return through factor-based strategies.
More about factor investing
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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.
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Smart beta is one subset of factor investing. Factor investing harnesses the power of broad and persistent drivers of return. Factor investing can refer to macro factors (which affect returns across asset classes) as well as style factors (which affect returns within asset classes) and can be implemented with or without leverage. Smart beta strategies generally refer to style factors within a single asset class, implemented without leverage, most commonly in style factor strategies that are long only and index based, most commonly in an ETF.
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When it comes to factor-based strategies, investors have a lot of options. Each strategy is constructed in a unique way and may have different risks. It’s important that investors understand underlying exposures in the context of the outcome you wish to achieve. Investors who choose long-short factor strategies will add risks associated with leverage.
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One of the most pervasive myths around factor investing is that it must be used instead of indexed or active investments. Factor-based strategies, including Factor ETFs, can be used both to replace and to complement traditional index or active investments in the portfolio.
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As with any investment, there's no guarantee of performance. Individual factors have tended to perform well at different parts of the economic cycle, and may be less correlated with equity market moves. Be aware of this aspect of factor investing as you investigate whether any particular strategy makes sense with your investment goals. A multi-factor investment is diversified across factors and may help to reduce the effect of this cyclicality.