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Factor investing video library

View the latest insights from industry experts.

What is factor investing?

Factor investing can help investors pursue specific outcomes, such as reducing risk or outperforming the market. Learn more about what factors are, why they have worked and ways you can access factors today (we don’t specifically cover how to implement them in your portfolio in this video).

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    Factor investing

    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 behavior, 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 behavioral 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.

Three things to know about factors

How can you sort through the rapidly expanding universe of smart beta strategies? Here are three rules of thumb on factor investing to help you get started.

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    Three things to know about factors

    Sara Shores: With so many choices, what rule of thumb do you have for investors to think about sorting through the smart-beta universe?

    Andrew Ang: First, it's all about your factor exposures. Know what you own. Factors are the broad, persistent drivers of returns which power smart-beta strategies.

    But the performance of these factors changes over the business cycle. When the economy isn't doing so well, low volatility and quality shine. Momentum tends to do well when the economy is booming. When we can harness different factors together in a portfolio, we obtain more diversified outcomes. And investing with a combination of factors has historically enhanced returns relative to traditional market cap-weighted indices.

    Sara Shores: So factor exposures matter. What else matters?

    Andrew Ang: Portfolio construction and implementation also matter. My kids love to bake brownies, and everyone knows that you need butter and chocolate to make a good brownie. Those are factor exposures. So how do you combine them? Do you do it over thousands of assets? Do you sector-neutralize? How often do you rebalance? The recipe also matters. And finally, the chef matters.

    This is especially true because smart beta tends to have a higher level of turnover and potentially higher illiquidity compared to traditional market-cap indices.

    Sara Shores: And that makes implementation all the more important -- the skilled tradeoff of risk, return and cost?

    Andrew Ang: Yes. So three things matter: factors, portfolio construction, and implementation.

    Sara Shores: A few rules to live by.

What is smart beta?

While the term smart beta has proliferated across the investment industry, many investors have been using these strategies for decades. Sara Shores explains smart beta investing and the potential benefits to your portfolio.

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    What is smart beta?

    Smart beta is one of the fastest growing categories in the industry today; you can hardly open a newspaper without reading a headline about it. But what is smart beta?

    Well… let’s ask Google.

    What is smart beta?

    There’s 71 million search results but the number one result is from the Financial Times and it says, “Smart beta is a rather elusive concept in modern finance.”

    Is smart beta really elusive?

    Well, it is to some, and that’s why we’re here today, to try to talk about the basics of smart beta and dispel some of the confusion.

    Smart beta seeks to enhance returns, improve diversification, and reduce risk for investors. It’s really a combination of what we think of as active and passive investing.

    It’s active in that it aims to outperform a cap-weighted index after taking into consideration risk, return and cost. But it’s passive in that implementation is transparent and based on pre-set rules. Ideally those rules are objective enough that you can write them down and give them to somebody else to implement.

    It often comes in the form of an ETF or an index fund, and smart beta strategies capture many of the themes that have historically been present in traditional active strategies, but usually at a much lower fee.

    How does smart beta do that?

    Well, to answer that question we have to understand “factors”.

    Factors are investment characteristics that help explain the risk and return behaviour of a security. For example, stocks in the same industry tend to move together. Or bonds with a similar maturity would tend to move together. You might think of it as the DNA of a stock or a bond. So just like your DNA might govern your stubborn streak or the color of your eyes a stocks DNA its factors help explain a lot about its behaviour. Now some, but not all factors have historically had a positive and persistent return over the long term and those are the ones we are most interested in. Smart beta ideas are also well understood by the marketplace, let’s look at value.

    And I’m going to ask Google.

    So the definition of value from the Webster’s dictionary is something that can be bought at a low or a fair price and put in an investment context what that means is that less expensive securities have historically outperformed their more expensive peers. So over the long-term, investors are rewarded for holding those lower profile potentially riskier names.

    So smart beta strategies try to target those ideas that are value creating, well understood, persistent and diversifying over time.

    Now, many of these concepts are not new ideas like value or quality have long puttered the stock selection framework for active managers. But what is new, is the idea that we can capture them with consistency and inexpensively in a passively oriented portfolio.

    And that is a pretty powerful idea. So there you have it. Smart Beta. It’s a smart way of thinking about investing beyond traditional active and passive.

What are macro factors?

BlackRock’s research suggests that we can explain more than 90% of the returns across asset classes through six primary macro factors. Watch BlackRock Head of Factor Investments, Ked Hogan, explore the topic.

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    Macroeconomic Factors

    Investing today is harder than ever.

    Markets gyrate, move sideways and sometimes suddenly reverse. A traditional portfolio that seems well-diversified across stocks, bonds and other asset classes can still be exposed to sudden and painful sell offs.

    Why? Because many asset classes that appear distinctive are affected by common influences. For example, a slowing economy can lead to losses in stocks, high yield bonds, real estate and many hedge fund strategies. They are all exposed to the economic cycle.

    Let’s go back to basics. By understanding the fundamental factors that drive risk and returns across all the asset classes, investors can create more diversified portfolios and improve the likelihood of meeting investment objectives.

    BlackRock’s research suggests that we can explain more than 90% of asset class returns through six macro factors: economic growth, real interest rates, inflation, credit, emerging markets and liquidity. Each of these factors is a unique source of potential return.

    Let’s take a closer look at each one. Economic growth is based on the overall health of the economy. When global GDP is strong, growth-sensitive assets like equities, real estate and commodities have tended to do well.

    Conversely, these assets have tended to struggle when the economy disappoints. Investors can potentially earn returns for bearing the risk in the event of economic decline.

    Interest rates, inflation and credit are also distinct factors. For example, the return of government bonds are impacted by the risk of unexpected changes in interest rates and inflation. Corporate bonds generally earn an extra return for bearing the risk of potential default.

    The emerging markets factor can potentially reward investors for taking on the additional geopolitical risks inherent in developing markets.

    Finally, the liquidity factor may offer rewards for holding assets that are less easily bought and sold, like small-cap equities.

    A combination of these six macro-economic factors can explain the return of traditional asset classes.

    For example, government bonds take on both interest rate and inflation risks. Equities generally have some sensitivity to unexpected changes in rates and inflation, but are largely driven by exposure to economic growth.

    Building a portfolio that deliberately balances these factors allows investors to look beyond traditional asset classes to what truly drives returns. Doing so can help investors create more diversified portfolios that may better withstand market drawdowns, and help them achieve their long-term investment 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. To find out how you can harness factor investing to help achieve your investment goals, visit us on our website.

Factor investing with data and tech

Andrew Ang and Sara Shores discuss how data and technology are driving factor investing.

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    Factor investing with data and tech

    Sara Shores: We've seen an acceleration in the adoption of factor strategies amongst investors both large and small. So tell us a little bit about some of the trends that you've seen and what's propelling that growth.

    Andrew Ang: I've seen an explosion of interest in Factor investing since my advisory work to the Norwegian Sovereign wealth Fund in 2009 and factors make very intuitive what investors now hold as complex portfolios. Factor investing cuts through to the chase for what really matters, drivers of returns. It's not surprising that this popularity has been going.

    Sara Shores: But what's the Catalyst? What do you think has really led to that explosion today?

    Andrew Ang: It's data and Technology. Data and Technology have transformed our everyday lives.

    We now use our phone to order coffee, or find a place to stay, or buy an airline ticket. 20 years ago, if you are coming to my office, you would have phoned up for directions and jotted them down on a scrap of paper. Ten years ago, you could print out a map on the internet. Five years ago you could drive your car with GPS and today you can walk down the street with your phone and find directions in real time. Those same advances in data and technology we've been able to harness. We take those broad persistent drivers of returns factors take those performance drivers and bundle them up in a vehicle and make them available for the everyday investor.

    Sara Shores: So how does data and technology change the way that we actually build portfolios? How does that translate to smart beta?

    Andrew Ang: Data and Technology have empowered the individual it shifted the balance of power away from these large complex institutions and delivered it into the hands of you and me, everyday investors. Previously we could only apply these insights to market cap portfolios. But now we've rewritten the rules of indexing we've harnessed these broad persistent drivers of returns these proven investment insights. We do this across thousands of assets, globally, and will put that power into the hands of everyday investors.

    Sara Shores: So making what used to be accessible only to the largest institutions now available to everyone.

What is minimum volatility?

Heightened volatility may very well be the new normal, but continual ups and downs can be tough for anyone to ride out. Learn how minimum volatility strategies can help you stay invested.

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    Minimum Volatility

    Factors are broad, persistent drivers of return across and within asset classes. Factor investing empowers investors seeking to achieve a wide range of goals from generating returns to reducing risk and improving diversification. Let’s a take a closer look at minimum volatility, one of several persistently rewarded style factors.

    Markets tend to rise over time, but sometimes with abrupt ups and downs. Many investors are driven by emotion, selling off near market lows thereby abandoning their investment objectives and potentially missing out when markets recover.

    Minimum volatility strategies have historically provided downside protection by screening for stocks with more stable prices. They have historically delivered market-like returns with less risk in times when market volatility is high, as well as over the long term.

    Academic research suggests minimum volatility has worked as a result of persistent structural impediments and behavioral anomalies.

    Some investors face market rules or restrictions that make certain investments off limits. For example, many investors have high return targets, but cannot use leverage. So they buy higher risk stocks to try to meet those return ambitions, pushing up their prices. Low risk stocks may be ignored, increasing their potential upside.

    Investors are not perfectly rational all the time. In what is known as the lottery effect, investors tend to chase flashy, riskier stocks, believing that the probability of winning is high even if the odds are stacked against them. This behavior can bid up the price of high-risk names, leaving lower risk securities overlooked and often underpriced.

    Minimum volatility strategies seek to capitalize on these well-known tendencies to take advantage of inefficiencies and provide opportunities for investors.

    A well-diversified minimum volatility strategy can be used for core, long-term equity holdings. This can help investors experience fewer ups and downs, making it easier to stay invested and achieve long term goals.

    To find out more about how to put minimum volatility to work to advance your investment goals, please visit us at BlackRock.com/factors.