smart beta · factor tilts
Factor investing
A strategy that systematically tilts portfolios toward documented return factors — value, size (small-cap), momentum, quality, low-volatility — based on academic empirical research.
Factor investing is the systematic tilt of a portfolio toward documented return factors identified by academic empirical research. The most-cited factors are value (cheap relative to fundamentals), size (small-cap), momentum (recent winners), quality (high return on equity, low debt), low-volatility, and profitability.
In product form, factor investing usually appears as "smart-beta" index funds — rules-based portfolios that mechanically tilt away from market-capitalisation weights toward factor weights. The rules are transparent and the fee level sits between a pure index fund and an active fund. In NZ the most prominent smart-beta range is Smartshares' US 500 Top 50 (size + concentration tilt), and a small number of offshore factor-tilted sub-funds accessed via NZ wrappers.
Factor performance is variable across periods. Long-run academic studies find premia for value, size, momentum and quality on average, but with multi-year stretches of underperformance. The 2010s decade was challenging for value and small-cap factors in particular. Factor investing is therefore typically used inside a diversified portfolio rather than as a standalone bet.
Related terms
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index-vs-active
Index fund vs active fund
An index fund mechanically tracks a published market index. An active fund's manager makes discretionary buy/sell decisions trying to beat or differ from a benchmark.
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etf-vs-managed-fund
ETF vs managed fund
An exchange-traded fund (ETF) is a managed fund whose units trade on a stock exchange like a share. A traditional unit-priced managed fund is bought and sold directly with the manager or platform at the fund's daily NAV.