Why factor diversification matters in the stock market now

• Traditional equity benchmarks may provide less diversification than investors expect. Market-capitalization benchmarks are being dominated by a narrower set of companies, as well as rising concentration across factors.
• Multifactor ETFs may help investors diversify unintended factor exposures embedded in traditional benchmarks and potentially reduce reliance on a single market regime.
• Multifactor strategies such as the iShares U.S. Equity Factor Rotation Active ETF (DYNF) and the iShares International Equity Factor ETF (INTF) may help investors seek more resilient portfolio outcomes across changing market regimes.

Concentration risk is one of the most talked about concerns for investors in 2026. That isn’t surprising given the so-called Magnificent Seven stocks currently comprise nearly 30% of the S&P 500 Index.¹

But there’s another type of concentration risk investors may be unaware of: Factor concentration.

Factors are persistent and well-documented characteristics that can help investors understand differences in expected return. BlackRock has 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. (Learn more about the basics of factor investing.)

As illustrated below, factor exposures have become much more concentrated since 2022. Quality, in particular, which refers to companies with strong financials relative to their peers, has become a dominant factor exposure in the U.S.

This shift in factor concentration may have important portfolio implications.

What were once more broadly diversified, market-capitalization benchmarks have evolved into portfolios dominated by a narrower set of companies and, by extension, a narrower set of performance drivers. For investors, this raises an important question: Are traditional equity benchmarks still delivering the diversification benefits they have historically provided?

We believe the answer is “no”.

When a single factor exposure dominates, diversification may weaken, and outcomes may become more dependent on the persistence of any given factor; for example, a period when Value stocks are doing well as a whole, such as after the bursting of the dot-com bubble.

As regime leadership rotates—and it inevitably does—portfolios with a high degree of concentration in any given factor may experience increased volatility and drawdowns when that single factor exhibits underperformance. For example, within U.S. equities, the Quality factor underperformed the broad market in 2025.²

Multifactor strategies, which deliberately seek to combine multiple factors within a single portfolio, may reduce reliance on any one regime, and can potentially promote more stable investment outcomes over time.

Rather than accept unintended concentrated factor exposures, investors may consider multifactor ETFs to diversify their factor exposures and potentially mitigate unintentional risks embedded in broad-based benchmarks.

Active multifactor ETFs such as the iShares U.S. Equity Factor Rotation Active ETF (DYNF), exemplify this approach by dynamically rotating across factors, seeking to adapt to ever-changing market conditions. DYNF dynamically selects stocks based on their exposure to characteristics — such as value or momentum — that the model identifies as well-positioned to outperform in the near term.

Similar dynamics exist in developed international equity benchmarks. Figure 2 illustrates the rolling factor weights of the MSCI World Ex USA Index over time, highlighting how factor exposures have also become increasingly concentrated in developed markets outside of the U.S.

Relative to what we observe in the U.S., international developed markets have historically exhibited more balanced factor exposures, particularly with Value playing a larger role in Europe. However, as illustrated in Figure 2, we have seen a meaningful reduction in diversification in recent years, with returns increasingly driven by just a few dominant factors, most-notably Quality (like the U.S.).

This trend shows that rising factor concentration is not solely a U.S. phenomenon, but a broader structural shift across international developed equity markets. Like investors in U.S. equities, investors seeking exposure to international markets may consider the iShares International Equity Factor ETF (INTF) to seek more intentionality in their factor exposures and to potentially increase diversification.

Today’s market regime is characterized by rising concentration and narrowing factor leadership. As a result, we believe investors can no longer assume that traditional benchmarks provide sufficient diversification. Instead, they may embed unintended exposures that may increase risk.

Multifactor strategies, both active and index, offer a more deliberate approach that may help rebalance these exposures, diversify across rewarded factors, and reduce reliance on any single market regime. In our view, by combining dynamic U.S. factor rotation through DYNF with systematic international multifactor exposure via INTF, investors can seek to improve diversification and potentially improve resilience across market cycles. (Learn more about BlackRock’s dynamic factor timing strategy.)

An overview of 5 different factors