Factor investing explained

Factor investing is the idea that certain characteristics of stocks — size, value, momentum, quality, profitability — are associated with higher long-term returns, after adjusting for risk. Instead of picking stocks, you systematically tilt your portfolio toward these factors using funds designed for it.

The main factors

• Size: small-cap stocks have historically beaten large-cap stocks over long periods (the 'size premium').
• Value: cheap stocks (low price-to-book, low P/E) have beaten expensive stocks (the 'value premium').
• Momentum: stocks that have recently outperformed tend to continue outperforming for 6–12 months.
• Quality: profitable, stable, low-debt companies have outperformed the junk.
• Low volatility: less volatile stocks have produced higher risk-adjusted returns — counterintuitive but well-documented.

Does it actually work?

It depends on the factor, the timeframe, and whether you can stick with it. Value famously underperformed for a decade during the 2010s before roaring back. Any factor can have long dry spells that test the patience of anyone who tilted toward it.