Opportunities in 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.

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    Global markets are made up of dozens of asset classes and millions of individual securities…making it challenging to understand what really matters for your portfolio. But there are a few important drivers that can help explain returns across asset classes. These FACTORS are broad, persistent drivers of return that are critical to helping investors seek a range of goals from generating returns, reducing risk, to improving diversification.

    Today, new technologies and expanding data sources are allowing investors to access factors with ease.

    Factors are the foundation of investing, just as nutrients are the foundations of the food we eat. We need carbohydrates and protein to power through the day, which we can find in different foods like bread, milk, and fruit. Putting together a balanced diet means understanding what nutrients are contained in our food, and choosing the mix that best supports our body’s needs.

    Similarly, knowing the factors that drive returns in your portfolio can help you to choose the right mix of assets and strategies for your needs.

    There are two main types of factors that drive returns. Macro factors like the pace of economic growth and the rate of inflation can help to explain returns across asset classes like equity or bond markets.

    Style factors can help explain returns within those asset classes. For example, Value stocks – those that have low prices relative to fundamentals – have historically generated returns greater than the broad market.

    Factors can help us build portfolios that better suit individual needs; just as knowing the nutrients in your food can help your body perform. Similarly, investors looking for downside protection in a volatile market environment might add exposure to minimum volatility strategies to seek reduced risk, while Investors who are comfortable accepting increased risk might look to more return-seeking strategies like momentum.

    Now – why do factors work? Extensive research, including that of Nobel prize winners, has proven that certain factors have driven returns for decades. These factors have generated returns due to the following three reasons: an investor’s willingness to take on risk, structural impediments, and the fact that not all investors are perfectly rational all the time.

    Some factors earn additional returns because they involve bearing additional risk, and may underperform in certain market regimes.

    Some factors arise from structural impediments, those investment restrictions or market rules that make certain investments off-limits for some investors, creating opportunities for others who can invest without those constraints.

    And finally, some factors capture investor behaviour, that is, actions of the average investor that are not always perfectly rational. Sometimes people want French fries instead of salad even if they are watching their cholesterol. These behavioural biases can give rise to investment opportunities for those who can take on a contrarian view.

    Let’s discuss ways to access factors. Advancements in technology and data allow investors to take advantage of these time-tested ideas in new ways, from smart beta to enhanced factor strategies.

    Smart beta strategies target factors using a rules-based approach, usually with the goal of outperforming a market-cap weighted benchmark. Smart beta strategies are now widely available in ETFs and mutual funds, making factor strategies affordable and accessible to every investor.

    Enhanced strategies use factors in more advanced ways - trading across multiple asset classes, sometimes investing both long and short. Investors use these enhanced factor strategies to seek absolute returns or to complement hedge fund and traditional active strategies.

    Factors can help to power your investments and can help to achieve your goals.

    BlackRock is a leader in factor investing, launching the first factor fund in 1971 and driving innovation in the category for over 40 years.

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.

Hover over each factor to learn more.

Factor Investing: Outer image
Factor Investing: Inner image

VALUE

Stocks discounted relative to their fundamentals

ECONOMIC GROWTH

Exposure to the business cycle

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

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

Value
Momentum
Minimum Volatility
Quality
Size
Carry
Economic Growth
Real Rates
Inflation
Credit
Emerging Markets
Liquidity
STYLE
Value
VALUE
Stocks discounted relative to their fundamentals
Momentum
MOMENTUM
Stocks with upward price trends
Quality
QUALITY
Financially healthy companies
Minimum Volatility
MINIMUM VOLATILITY
Stable, lower-risk stocks
Size
SIZE
Smaller, high-growth companies
Carry
CARRY
Income incentive to hold riskier securities
MACROECONOMIC
Economic Growth
ECONOMIC GROWTH
Exposure to the business cycle
Real Rates
REAL RATES
The risk of interest-rate movements
Inflation
INFLATION
Exposure to changes in prices
Credit
CREDIT
Default risk from lending to companies
Emerging Markets
EMERGING MARKETS
Political and sovereign risks
Liquidity
LIQUIDITY
Holding illiquid assets

 

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.

Factor investing is the way of the future. It’s about empowering investors to deliberately and directly access ideas to help achieve their financial goals.
Andrew Ang

Factors can help meet portfolio objectives

Certain single- or multifactor strategies can help provide above-market returns.
Minimum volatility strategies aim for below-market risk.
Allocating across macro factors enables investors to seek greater portfolio diversification.

How to access factors

BlackRock offers a range of solutions designed to tap into the potential of factors – from low-cost, efficient smart beta ETFs to smart beta target date funds to dynamically managed and enhanced factor strategies.

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Smart beta ETFs and mutual funds provide investors with low-cost, efficient access to factor strategies.

Investors can access advanced strategies that incorporate BlackRock’s active insights, invest across asset classes and employ leverage and shorting. Investors may use these strategies to seek absolute returns or to complement hedge funds and traditional active strategies.

Our views on factors

Stay up to date on the latest research and insights from BlackRock’s factor investing professionals.

Andrew’s Angle: Value investing: The long-term appeal of the underdog
Growth stocks have been zooming past value stocks – is value dead? No! Strongly consider staying the course because value has historically outperformed over the long run.
Read more Read more

More about factor investing

What’s the difference between factor investing and smart beta?

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 an ETF.

What are the risks associated with factor investing?

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 what risks are applicable to each strategy and how those may fit within their overall portfolio. Investors who choose long-short factor strategies will add risks associated with leverage.

What are some of the myths associated with factor-based investing?

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 smart beta ETFs, can be used both to replace and to complement traditional index or active investments in the portfolio.

Important consideration

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.

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 smart beta ETFs and target date funds, which offer low-cost, efficient access to factor strategies, to multi-asset, multi-factor strategies, that incorporate BlackRock's active insights, invest across asset classes and employ leverage and shorting.

You can also tap into BlackRock's deep experience with investment factors via insights provided by our factor experts (such as Andrew Ang and Sara Shores) and online resources and tools designed for investors seeking access to factor investing opportunities.

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