Factor investing rests on the premise that stocks with certain characteristics – known as factors – tend to outperform the broad market over the long term. Incorporating factors in their portfolios therefore has the potential to allow investors to achieve better investment outcomes.
Common factors include Value, Size, Momentum, Quality, Dividend Yield and Low Volatility. All six have delivered considerably higher risk-adjusted returns than the standard equity market in the past. However, a close examination has also revealed risks. While being predictive of outperformance historically, the factors also experienced periods of underperformance and exhibit some cyclicality.
There are three basic approaches to factor investing:
- Buy and hold preferred factors, expecting their long-term outperformance to bring success
- Tactical positioning or factor timing to express a view on valuations of specific factors
- Rotation between factors along the business cycle, exploiting the fact that different factors out- and underperform in different phases of the cycle
UBS provides a number of factor-based ETFs as transparent and cost-effective vehicles to implement these approaches. We also offer a combination of factors in a comprehensive multi-factor solution, which lifts a significant burden from the investor and is explored here.
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 concrete 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.