Factor Investing

Factor investing is a strategy that chooses securities on attributes that are associated with higher returns. It utilizes various factors, including macroeconomic as well as fundamental and statistical, to analyze and explain asset prices and build an investment strategy. Factors that have been identified by investors include growth vs. value; market capitalization; credit rating; and stock price volatility, among several others.

  • Factor investing, from a theoretical standpoint, is designed to enhance diversification, generate above-market returns, and manage risk. 
  • There are two main types of factors that have driven returns of stocks, bonds, and other factors: macroeconomic factors and style factors.
  • Macroeconomic factors capture broad risks across asset classes while style factors aim to explain returns and risks within asset classes.
  • Some common macroeconomic factors include the rate of inflation; GDP growth; and the unemployment rate.
  • Microeconomic factors include a company's credit; its share liquidity; and stock price volatility.
  • Style factors encompass growth versus value stocks; market capitalization; and industry sector.