Unpacking Factor Investing: A Strategic Approach to Boosting Portfolio Performance

Factor investing is a sophisticated investment strategy that seeks to enhance returns by targeting specific drivers of performance across various asset classes. Simply put, an investment factor is an underlying characteristic that can explain the returns of a group of stocks, or even an individual stock.

This concept was first introduced by Eugene Fama and Kenneth French in 1993 through their groundbreaking paper on the three-factor model. Over the past three decades, research has expanded, revealing multiple factor patterns and further refining our understanding of how these drivers influence investment outcomes.

At its core, factor investing simplifies the complex nature of markets, offering a clear framework to explain the performance of your investments. By focusing on factors, investors can improve portfolio outcomes, reduce volatility, and enhance diversification—making it a powerful approach for achieving long-term financial goals.

Factors are instrumental in driving your investment success, and today, one of the most accessible ways to invest in them is through ETFs designed around specific factor strategies.

To illustrate the potential of factor investing, we've identified the top five factors in the S&P 500 and the STOXX 600 over the past 10 years:

S&P 500: Top 5 Factors Over the Last Decade

Europe STOXX 600: Top 5 Factors Over the Last Decade

These factors have demonstrated substantial returns, significantly outperforming their equally weighted universes. Whether you are looking to improve the performance of your portfolio, reduce risk, or diversify your investments, focusing on these factors can help you achieve your financial objectives.

In today’s market, ETFs focused on factor strategies offer a practical way to harness these drivers of return. As always, it’s important to consider your specific investment goals and consult with a financial advisor to tailor the approach to your needs.