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Factor investing: An investment strategy that's pulling in the big bucks

by , 09 July 2014

‘Factor investing' is all the rage at the moment. Also called ‘smart beta,' many exchange traded funds (ETFs) are using this strategy to great effect.

JP Morgan estimate that funds using this strategy hold assets of nearly $400 billion. A rise of more than 200% over the past five years.

So what is factor investing all about? And why is it growing in popularity?

Read on to find out…

What is factor investing?

Factor investing is a strategy that involves looking for certain ‘factors’ (or characteristics) that groups of stocks share that make them more likely to beat the market average.

A wide array of factors relate to investment returns, but there are five popular ones, Cris Sholto Heaton in Money Week explains:

#1: Value
These are shares with low valuations. This means they’re trading at less than their ‘intrinsic’ value. And these shares have shown to beat shares that have high valuations.

#2: Size
Looking back at stock market performance, smaller companies beat larger ones.

#3: Momentum
Shares that have performed well recently tend to continue to do so.

#4: Low volatility
Over the long-term, shares with low volatility tend to perform better than those with higher volatility.

#5: Quality
High quality shares tend to perform better than their poor quality counterparts. So companies with low debt, consistent earnings and high returns on equity.

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How factor investing performs

Of course, picking shares according to the above criteria doesn’t guarantee outperformance.

But studies show that over the long-term, portfolios containing shares with these five factors comfortably beat the market.

So there you have it, factor investing, a strategy that’s pulling in the big bucks.



Factor investing: An investment strategy that's pulling in the big bucks
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