Factor Investing
A strategy that targets specific return drivers such as value, size, momentum, or quality.
What is Factor Investing?
Factor investing is an investment approach that targets specific, systematic characteristics — called factors — that have been shown to drive excess returns over time. Common factors include value (low price relative to fundamentals), size (small-cap premium), momentum (recent strong performers continue), quality (high profitability, low debt), and low volatility. Factor-based strategies sit between pure passive indexing and active stock picking, offering a rules-based, diversified approach to capturing these return premia at lower cost than traditional active management.
Example
The Fama-French three-factor model (1993) showed that small-cap and value stocks delivered excess returns relative to the market over long periods, forming the academic foundation for size and value factor funds.
Source: Fama, E.F. & French, K.R. — The Cross-Section of Expected Stock Returns, Journal of Finance 1992