In the past 20 years, investment managers have identified upward of 200 different factors, which include everything from seasonality to a CEO’s gender. Although there is still debate about how to define a factor, the consensus is that there are five generally accepted factors that have been found to be persistent and repeatable over time: value, momentum, quality, size and minimum volatility.
There are two main reasons for using factor-based ETFs (also called smart-beta or rules-based strategies). Many portfolio managers feel, as I do, that factors can add alpha. Nobel Prize-winning research has shown that over time, some factors can outperform the broad-based market index. If you share this conviction, it makes sense to move beyond a market-capitalization strategy to build investment portfolios.