FACTOR INVESTING

Pricing the damage: Factors for all weathers

WHAT ARE FACTORS?

Factor investing is the strategy of capturing securities with specific characteristics such as value, quality, momentum, size, and minimum volatility. Factors are persistent and well-documented characteristics that can help investors understand differences in expected return. The term may be unfamiliar, but the concepts behind it aren’t new at all. In fact, institutional and active managers have been using factors to manage portfolios for decades.

Factors have been, and continue to be, tools that professional investors use to seek outperformance, reduce volatility or looking to balance unintended factor-tilts in their broader portfolio. Thanks to exchanged traded funds (ETFs), factor strategies aren’t just for professional investors anymore, offering access in a transparent and cost-effective way.

Risk: There can be no assurance that performance will be enhanced or risk will be reduced for strategies that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a strategy may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

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FACTORS EXPLAINED

Factors are the foundation of investing—broad, persistent drivers of returns across asset classes. Understand how factors work to better capture their potential for excess return and reduced risk, just as leading investors have done for decades.

Remember how hard it used to be to book a vacation? We used to spend hours on the phone with a travel agent, then wait days, even weeks for them to work their magic and that magic came with a high fee because only travel agents had access to the important information needed to book our vacation.

But the information that was once only available to travel agents is now available to anyone within seconds. Travel sites have made finding the perfect hotel cheaper, faster, and more efficient. The same is true for investing. For years, active managers use teams of analysts to find stocks that seemed more likely to outperform and as an investor, you had to pay a lot in fees to access that thinking.

Many of the traits that active managers have looked for like buying underpriced quality stocks are called factors. And just like you no longer need to call a travel agent to book an affordable quality vacation, you no longer need to pay large fees for active managers to choose the right stocks based on factors. Now, you can use iShares Factor ETFs to invest in stocks that exhibit the factors that have historically driven portfolio returns. Just as travel sites use simple filters to quickly drill down to the perfect hotel, factor investing provides access to security screens that active managers have used for generations. Thanks to data and technology, the investment ideas that once took a team of analysts months to research now takes a fraction of the time at a fraction of the cost.

There are five factors that have historically proven to be drivers of return. And iShares offers ETFs that seek to capture all five. There's quality, which identifies companies with strong and healthy balance sheets. Minimal volatility or stocks that are less volatile than the broad market. Size, which targets smaller, more nimble companies. Momentum, which seeks stocks on an upswing and value, which targets stocks that are inexpensive relative to their fundamentals.

Factor ETFs deliver the power of time-tested investment screens in a low-cost and tax-efficient investment vehicle. Revolutionizing access for everyday investors. Who said finding the right securities for your portfolio was difficult? We say, it's as easy as booking a hotel.

Visit ishares.com to view a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.

WHY FACTORS

The core of factor investing is the belief that certain traits in securities will lead to outperformance or reduced risk over the long term. This belief has been explored in academic theory and research. All factors that we believe in – value, quality, momentum, small size, and minimum volatility – have an economic rationale for why they have existed historically and why we expect them to persist going forward. Each factor is the result of a reward for bearing risk that other investors are not willing to bear, investor behavioral biases, or structural impediments.

Some investors are looking for income, some are seeking to reduce risk, and others are focused on outperformance. Factor investing enables you to pursue a particular outcome.

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Seek outperformance

By selecting return-seeking factors investors can aim for returns above the market.

Low volatility
Reduce risk

Tilting toward low volatility stocks has produced investment outcomes with lower risk than the market.

iShares Factor ETFs employ the same intuitive screens used by active managers for generations but offer the low cost of traditional ETFs. Each factor can help achieve a simple objective, such as investing in stocks which are trending upwards, through a set of clear screens.

LEARN MORE ABOUT THE 5 FACTORS

We have identified five factors -- value, quality, momentum, size, and minimum volatility -- that have shown to be resilient across time, markets, asset classes, and have a strong economic rationale.

VALUE

Select stocks that are lower cost relative to their peers after controlling for fundamentals. Cheapness does not necessarily stand for upside potential –sometimes a stock or even a sector remains cheap for a reason. Has tended to perform well in periods of economic growth or risk-on environments.

QUALITY

Quality investing strategies look for stocks that have higher quality earnings. That means that we’re looking for stocks that are profitable, have low leverage, and demonstrate consistent earnings over time.¹ Has traditionally outperformed the broad market during periods of high volatility.

MINIMUM VOLATILITY

Minimum volatility investing involves building a portfolio of stocks that have exhibited lower volatility compared to the broad market. Unlike the other four factors, the goal of minimum volatility is not necessarily to enhance return, but to reduce overall risk.²

MOMENTUM

Momentum investing is concerned with stocks that are trending in a particular direction. Sometimes investors are irrationally exuberant or incomprehensibly dour. The strategy tends to work best in upward or downward trending markets.

SIZE

The size factor focuses on smaller, more nimble companies. Smaller companies may be more nimble, and can potentially more easily adjust and identify new investment opportunities in the marketplace. Smaller size companies have tended to perform well in the early stages of an economic upswing

MULTIFACTOR

Multifactor strategies build upon the long-standing concept of diversification: that combining exposures to multiple drivers of returns otherwise known as factors can help soften the effect of drawdowns and increase the potential for outperformance.

FACTORS AND ESG

Sustainability and Factors are not mutually exclusive. We believe building portfolios that optimise for both factor exposures and sustainability characteristics can potentially benefit performance and improve sustainability characteristics with relatively low factor degradation.

QUALITY INCOME

Quality Income strategies look for stocks that have higher quality earnings and a higher dividend yield. That means that we’re looking for stocks that are profitable, have low leverage, demonstrate consistent earnings over time whilst also maximising its exposure to the Yield factor.

BUILDING PORTFOLIOS – FROM THEORY TO PRACTICE

Individual factors have historically performed differently at different stages of the economic cycle based on specific drivers of that factor’s risk and return, but most factor returns generally are not highly correlated with one another, so investors can benefit from diversification by combining multiple factor exposures.

But when and how might investors consider using Factor ETFs in a portfolio?

Investors have traditionally used Factor ETFs in three main ways:

  1. Seeking outperformance 
  2. Managing risk in a portfolio 
  3. Expressing a short-term view on markets

There are a range of additional approaches to implementing factors within your broader portfolio, depending on your investment objectives and operational framework. 

Our team at Blackrock are here to help your organization with their unique requirements.

Portfolio solutions

WAYS WE CAN HELP

Our portfolio consultants, specialise in multi-asset portfolio construction across alpha-seeking and indexed strategies. Assessing existing portfolios, or guidance in building new propositions, we can help identify potential solutions that can bring you closer to your intended investment objectives.

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