Over the decades, investors recognized that certain characteristics of stocks (known as factors) hold hints on relative performance. Academic studies have confirmed that factors outperform the broader market to various degrees, across time periods and geographies. The most common factors include Value, Size, Momentum, Quality, Dividend Yield and Low Volatility.
Investing in factors can be done by choosing one or more preferred factors as a long-term investment, or perhaps timing or rotating from one factor to the next. However, studies suggest that timing and rotating factors is challenging to get right.
An alternative to single-factor investing is presented by multi-factor ETFs. Their aim is to improve portfolio returns while reducing the risk by diversifying across many factors. With this approach, investors effectively delegate factor allocation to the mechanics of the underlying index. It is ideal for those who want to benefit from factors simply and with a lower active risk compared to investing in single factors.
UBS offers a multi-factor solution based on the MSCI USA Select Factor Mix Index. The index maintains an equal-weight investment into six of the common equity factors: Value, Quality, Yield, Size, Momentum, and Volatility. In a back-test – and since going live more than a year ago – the portfolio provided excess return and a fairly smooth performance over time.
We invite you to download the most recent issue of our On Track Magazine for a closer look at factor investing in equities, for detailed information on this and other solutions and for further insights into the world of index investing.
Investors should be aware that past performance is not an indicator of future results.