What is factor investing?
Factor investing is an investment strategy that focuses on capturing the return premiums associated with specific characteristics or attributes of a security, such as size, value, momentum, quality, low volatility, etc. The idea is that these factors have historically provided higher returns than a broad market benchmark, and can be selected and combined to create a diversified portfolio. The approach is based on academic research in finance and economics and aims to provide a systematic and repeatable way to generate excess returns over time.
What are factor-based funds?
A factor fund is an investment fund that seeks to exploit specific market inefficiencies, known as “factors,” to generate returns. These factors can include value, size, momentum, quality, and low volatility, among others. Factor funds aim to deliver returns that are uncorrelated with the overall market, and are often used as a tool for portfolio diversification.
Factor funds are typically managed using a quantitative approach, relying on computer algorithms and historical data to identify and select stocks that meet the specific criteria of the desired factor. The goal is to achieve returns that are driven by the factor, rather than the overall market movements.
Factor funds can be either actively managed or passive, with the latter tracking an index that is designed to capture the returns of the specific factor. They can be used as standalone investments or as part of a broader investment strategy, depending on the investor’s goals and risk tolerance.
Top 3 Factor-Investment Funds to Look At
1. Avantis U.S. Small Cap Value ETF (AVUV)
Avantis U.S. Small Cap Value ETF (AVUV) is a top-notch exchange-traded fund that invests in small-cap companies in the United States that are considered to be undervalued. This ETF provides investors with a convenient and cost-effective way to access the potential returns of small-cap value stocks. AVUV offers several advantages, including exposure to a diversified portfolio of small-cap value stocks, low costs, and tax efficiency. With its strategic focus on undervalued small-cap companies, AVUV may be a compelling choice for investors seeking long-term growth potential.
Fund Overview
| Category | Small Value |
| Fund Family | Avantis Investors |
| Net Assets | 4.72B |
| YTD Daily Total Return | 9.81% |
| Yield | 1.74% |
| Legal Type | Exchange Traded Fund |
| Annual Report Expense Ratio | 0.25% |
| Inception Date | 09/24/2019 |
Advantages of the Avantis U.S. Small Cap Value ETF (AVUV) include:
- Focus on undervalued small-cap stocks: AVUV invests in small-cap companies in the United States that are considered to be undervalued, providing investors with a strategic focus on this asset class.
- Potential for higher returns: Small-cap value stocks have historically provided higher returns than the broader market, and AVUV provides exposure to this asset class through a diversified portfolio.
- Diversification: AVUV offers exposure to a diversified portfolio of small-cap value stocks, offering investors a simple way to diversify their portfolios.
- Low cost: AVUV has a low expense ratio, making it an attractive option for cost-conscious investors.
- Liquidity: AVUV is an exchange-traded fund, making it highly liquid and easy to buy and sell.
- Tax efficiency: ETFs like AVUV have a unique structure that can offer tax advantages compared to traditional mutual funds.
2. Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC)
The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) is an innovative ETF that utilizes a unique and dynamic approach to investing in large-cap stocks. GSLC seeks to provide investors with a differentiated exposure to the U.S. large-cap equity market through its ActiveBeta strategy, which combines traditional market capitalization-weighted indices with a rules-based, quantitative approach to select and weight components.
This ETF aims to deliver better risk-adjusted returns by using a factor-based approach that emphasizes certain attributes such as value, quality, and momentum. With its combination of low costs and a strategic approach to investing in large-cap stocks, GSLC may be a compelling option for investors seeking exposure to the U.S. large-cap equity market.
Fund Overview
| Category | Large Blend |
| Fund Family | Goldman Sachs |
| Net Assets | 10.23B |
| YTD Daily Total Return | 5.96% |
| Yield | 1.61% |
| Legal Type | Exchange Traded Fund |
| Annual Report Expense Ratio | 0.09% |
| Inception Date | 09/17/2015 |
Advantages of the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) include:
- Factor-based approach: GSLC employs a factor-based approach to investing that emphasizes certain attributes such as value, quality, and momentum.
- Potential for enhanced returns: GSLC’s factor-based approach seeks to deliver better risk-adjusted returns compared to traditional market capitalization-weighted indices.
- Diversification: GSLC provides exposure to a diversified portfolio of large-cap U.S. stocks, offering investors a simple way to diversify their portfolios.
- Low cost: GSLC has a low expense ratio, making it an attractive option for cost-conscious investors.
- Liquidity: GSLC is an exchange-traded fund, making it highly liquid and easy to buy and sell.
- Tax efficiency: ETFs like GSLC have a unique structure that can offer tax advantages compared to traditional mutual funds.
3. JPMorgan BetaBuilders U.S. Equity ETF (BBUS)
JPMorgan BetaBuilders U.S. Equity ETF (BBUS) is a smart choice for investors seeking broad exposure to the U.S. equity market. This ETF utilizes a straightforward and cost-efficient approach to investing by tracking a market capitalization-weighted index of large, mid, and small-cap U.S. stocks. BBUS seeks to provide exposure to the overall U.S. equity market, with the goal of delivering returns that closely track the performance of its benchmark. With its focus on low costs and broad market exposure, BBUS may be a suitable option for investors looking for a simple and low-cost way to gain exposure to the U.S. equity market.
Fund Overview
| Category | Large Blend |
| Fund Family | JPMorgan |
| Net Assets | 1.27B |
| YTD Daily Total Return | 6.53% |
| Yield | 1.57% |
| Legal Type | Exchange Traded Fund |
| Annual Report Expense Ratio | 0.02% |
| Inception Date | 03/12/2019 |
Advantages of JPMorgan BetaBuilders U.S. Equity ETF (BBUS) include:
- Broad market exposure: BBUS provides investors with broad exposure to the U.S. equity market, including large, mid, and small-cap stocks.
- Low cost: BBUS has a low expense ratio, making it an attractive option for cost-conscious investors.
- Easy diversification: By investing in a broad basket of U.S. stocks, BBUS offers investors a simple way to diversify their portfolios.
- Potential for returns that closely track the market: BBUS seeks to deliver returns that closely track the performance of its benchmark, making it a suitable choice for investors seeking broad market exposure.
- Liquidity: BBUS is an exchange-traded fund, making it highly liquid and easy to buy and sell.
- Tax efficiency: ETFs like BBUS have a unique structure that can offer tax advantages compared to traditional mutual funds.
In conclusion, factor-based funds offer an innovative approach to investing in the stock market, but it’s important to keep in mind the inherent risks associated with any investment in the stock market. It’s crucial to thoroughly research and understand each fund, as well as its underlying strategy, before making an investment. Additionally, it’s advisable to consult with a financial advisor to determine if factor-based funds are a suitable investment for you and your financial goals. Remember, diversifying your portfolio and investing for the long term can help mitigate the risks associated with the stock market.
Data as of 2/2/2023
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