Client Question: Factor Investing

August 25, 2022

If you listen or read investment-related news, you are likely to encounter the term “factor” or “factor based investing” as this concept has taken off in recent years. A client recently asked for our take on this concept. Great question!


Think of factors as traits or characteristics of the underlying company. Factors are not new – they have been present in companies issuing securities forever. Just like we all have personality traits, so do businesses issuing stock and bonds.

However, with the emergence of exchange traded funds (ETFs) over the past decade and their need to market and appeal to a variety of investors, there has been a renewed focus on factors. Factor-based investing allows investors to more readily deploy capital based on companies’ traits.

Factor-based investing involves the determination of factors that are likely to drive returns in a given market cycle – and then screening individual companies/securities against those traits. As noted above, many mutual funds or ETFs complete these screens and allow investors to pick and choose the trait(s) they feel will outperform in a given cycle.

For instance, in the current environment where growth is slowing, an investor may wish to target companies that have high levels of cash and low levels of debt, along with stable earnings and high margins . They could access companies with these traits by investing in the quality factor.

What are some other factors?

There is no master list of factors. However, here are a few of the most common (utilized by the ETF providers)

*Quality – identifies companies with strong and healthy balance sheets

*Dividends – identifies companies with high (and/or increasing) dividend yields

*Profitability – identifies companies with high profit margins

*Volatility – looking to identify stocks that are less volatile than the broad market

*Size – distinguishes businesses by size looking at market cap, sales, and assets

*Variability – looks at how consistent earnings, cash flow, and sales have been

*Momentum – stocks on an upswing

*Value – targets stocks that are inexpensive relative to their fundamentals

How is this different than other investment screens?

There are countless other ways to select securities for investment. For example, you can search by sector (ie: industry or area of focus of underlying business, such as consumer staples, technology, and energy), market cap (ie: size of business), or region (ie: country of domicile).

Factor-based investing is simply another way to approach things – where you are deciding first what traits are well-suited for the current environment and your portfolio – and then looking for the securities that fit the profile.

Keep in mind – a factor screen may just be one step in the process. For instance – you may wish to screen multiple factors, or you may wish to combine a factor and a sector screen, or you may apply a valuation screen over a factor screen. Think of factors as one of many tools in your investment research toolkit!

What’s the best screening approach for me?

Here comes your favorite answer – it depends! The type of screen(s) best suited for a given investor and their portfolio will depend on many factors – including but not limited to your asset allocation, risk tolerance, return objectives, and other holdings. Consult with your advisor to determine how and if factor based investing can best serve you

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment or tax advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio

Factor q

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