I couldn’t find a thread on this so thought it’d be worth creating one as factor investing seems to be quite a hot topic in the last couple of years and seems to be a big area of growth.
A lot of investors have made the jump from active management and stock picking to passive investing over the past decades and now some of those passive investors are making the next step towards factor investing.
What is factor investing / smart beta?
Factor investing is a strategy that chooses securities on attributes that are associated with higher returns. In recent research a lot of active managers returns in excess of the market have been shown to be a result of factor exposure, rather than stock picking.
It is possible to replicate exposure to these factors using an index, without having to pay an active manager to pick stocks. This has been dubbed ‘smart beta’ to differentiate it from the standard beta of market returns.
Should You Be Factor Investing? - Ben Felix on Youtube (this is a nice high level summary of factor investing, not a specific recommendation)
List of MSCI World Factor ETF discussion threads (shameless plug as I’d like some of these to be added)
I think factor investing might create a more decisions for passive investors in the future. Currently we focus a lot on asset classes (the Equities / Fixed Income split of our portfolio) typically starting with mostly equities and then shifting towards fixed income securities to manage risk as we approach target dates. I could easily see a future where people start with a focus on Quality / Momentum / Small Cap Equities and then shift towards Low Volatility equities and then fixed income.
In terms of my own preference I’m leaning towards having greater Quality factor exposure in my portfolio as I believe this will provide greater than market returns in the future (to be clear this is not investment advice)
I’d love to hear other’s thoughts on factor investing in general (even if you think it is pointless) as well as sentiment toward particular factors.