FACTOR INVESTING

Get Smart with Factors.

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EVERYONE IS A FACTOR INVESTOR

Factors are everywhere, they are not new; and they can help explain large parts of market returns across asset classes in the past, and as a result, could also explain returns in your portfolio. Conscious investors are aware of their factor tilts and use them to enhance returns, reduce risk, or seek greater diversification in their portfolios. But what are factors and how can investors deliberately target them?

Factors are broad and persistent sources of returns that explain the performance of different stocks, bonds, and other assets. Factor exposure should be measured, managed, and explicitly address factor exposures rather than letting them be implicit by-products of your portfolio.

WHAT ARE THE 5 FACTORS?

We have identified five factors - quality, value, momentum, size, and minimum volatility - that have shown to be resilient across time, markets, asset classes, and have a strong economic rationale.
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FACTORS EXPLAINED

Factors are the foundation of investing. Understand how factors work to better capture their potential for excess return and reduced risk, just as professional investors have done for decades.

Remember how hard it used to be to book a vacation? We used to spend hours on the phone with a travel agent, then wait days, even weeks for them to work their magic and that magic came with a high fee because only travel agents had access to the important information needed to book our vacation.

But the information that was once only available to travel agents is now available to anyone within seconds. Travel sites have made finding the perfect hotel cheaper, faster, and more efficient. The same is true for investing. For years, active managers use teams of analysts to find stocks that seemed more likely to outperform and as an investor, you had to pay a lot in fees to access that thinking.

Many of the traits that active managers have looked for like buying underpriced quality stocks are called factors. And just like you no longer need to call a travel agent to book an affordable quality vacation, you no longer need to pay large fees for active managers to choose the right stocks based on factors. Now, you can use iShares Factor ETFs to invest in stocks that exhibit the factors that have historically driven portfolio returns. Just as travel sites use simple filters to quickly drill down to the perfect hotel, factor investing provides access to security screens that active managers have used for generations. Thanks to data and technology, the investment ideas that once took a team of analysts months to research now takes a fraction of the time at a fraction of the cost.

There are five factors that have historically proven to be drivers of return. And iShares offers ETFs that seek to capture all five. There's quality, which identifies companies with strong and healthy balance sheets. Minimal volatility or stocks that are less volatile than the broad market. Size, which targets smaller, more nimble companies. Momentum, which seeks stocks on an upswing and value, which targets stocks that are inexpensive relative to their fundamentals.

Factor ETFs deliver the power of time-tested investment screens in a low-cost and tax-efficient investment vehicle. Revolutionizing access for everyday investors. Who said finding the right securities for your portfolio was difficult? We say, it's as easy as booking a hotel.

Visit ishares.com to view a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.

HOW DO INVESTORS USE FACTORS?

It’s important to recognize that your portfolio inherently carries factor exposure and that everyone is a factor investor. The question is whether you choose to deliberately allocate to these premiums or control for them.

Investors typically use factors to express a strategic view or a tactical view:

  1. Express short-term tactical views

    Investors may, during different market periods, use factors to express their short-term tactical view on markets as seen in the cyclical nature of factors. An investor, during a market contraction or times of increased volatility, may look to reduce risk in their portfolio by including a low volatility exposure.

  2. Express long-term strategic views
    We believe investors should assess their portfolios and benchmarks for any unintended factor biases. Investors should consider what’s in their benchmark. Most market-capitalization-weight indexes are effectively exposed to two or three factors. Supplementing a value-focused portfolio with exposures like quality or minimum volatility—traits often absent in typical value portfolios—can enhance diversification.
Image showing current factor exposure

Use our tool to look at the up to date factor exposure of all the main market indices.

LEARN MORE ABOUT THE 5 FACTORS

We have identified five factors - value, quality, momentum, size, and minimum volatility - that have shown to be resilient across time, markets, asset classes, and have a strong economic rationale.
VALUE

Select stocks that are lower cost relative to their peers after controlling for fundamentals. Cheapness does not necessarily stand for upside potential –sometimes a stock, or even a sector, remains cheap for a reason. Value tends to perform well in periods of economic growth or risk-on environments.
QUALITY

Quality investing strategies look for stocks that have higher quality earnings. That means we’re looking for profitable stocks with low leverage that have been demonstrating consistent earnings over time. Quality has traditionally outperformed the broad market during periods of high volatility.
MINIMUM VOLATILITY

Minimum volatility investing involves building a portfolio of stocks that have exhibited lower volatility, and more stability, compared to the broad market. Unlike the other four factors, the goal of minimum volatility is not necessarily to enhance return, but to reduce overall risk.1
MOMENTUM

Momentum investing is concerned with stocks that have particular price trends. Sometimes investors are irrationally exuberant or incomprehensibly dour. The strategy tends to work best in upward or downward trending markets as investors strive to make the most of price movements.
SIZE

The size factor focuses on smaller, more nimble companies which can potentially more easily adjust and identify new investment opportunities in the marketplace. Smaller size companies tend to perform well in the early stages of an economic upswing.2
MULTIFACTOR

Multifactor strategies build upon the long-standing concept of diversification: that combining exposures to multiple drivers of returns, otherwise known as factors, can help soften the effect of drawdowns and increase the potential for outperformance.
FACTORS AND ESG

Building portfolios that optimise for factor exposures and sustainability characteristics can mitigate investment risks and capture opportunities associated with sustainable and transition investing. All investor journeys are distinct, so analysis is offered to support investors’ varying needs.
QUALITY INCOME

Quality Income strategies look for stocks that have higher quality earnings and a higher dividend yield. That means that we’re looking for stocks that are profitable, have low leverage and demonstrate consistent earnings over time whilst also maximising its exposure to the Yield factor.

WAYS WE CAN HELP

Our portfolio consultants specialize in multi-asset portfolio construction across alpha-seeking and indexed strategies. Assessing existing portfolios, or guidance in building new propositions, we can help identify potential solutions that could bring you closer to your intended investment objectives.

LATEST INVESTMENT INSIGHTS

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PRECISION INSIGHTS

Take a look at our latest insights on equity style factors, which are regularly updated to reflect new micro- and macro-economic developments.

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FACTORS 101

Discover the basics of factors: our brochure, Get Smart with Factors, provides a straightforward overview of what factors are, how they're used by investors, and an in-depth look at our diverse offerings.

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Factor Focus Risk: Indices with a factor focus are less diversified than their parent index because they have predominant exposure to a single factor rather than the multiple factor exposure of most indices. Therefore, they will be more exposed to factor related market movements. Investors should consider this fund as part of a broader investment strategy