Factor investing is a systematic quantitative approach to stock selection that uses empirically validated factors—specific, measurable characteristics that explain differences in stock returns—rather than relying on subjective judgment or intuition. Academic research has identified several factors that have historically generated excess returns across global markets.
Major Investment Factors
- Value Factor: Stocks with low P/E, low P/B, and high dividend yields tend to outperform over long horizons
- Momentum Factor: Stocks with strong 3-12 month performance tend to continue outperforming in the short term
- Size Factor: Small-cap stocks have historically outperformed large-caps, particularly in US markets
- Quality Factor: Stocks with high ROE, stable earnings, and low debt ratios tend to be more resilient during downturns
Implementation Approaches
Traders can implement factor investing through single-factor strategies (focusing on one factor) or multi-factor strategies (combining 2-3 factors for diversification). Factor tilting—overweighting specific factors relative to a benchmark—is a popular approach for institutional investors seeking consistent alpha while maintaining broad market exposure.