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Although recent interest in factor-based investing would lead one to believe that this is a new-fangled trend, the truth is factor-based investing has existed for decades.
In fact, it has been a key component in the stock selection framework of active managers for years.
At its core, factor-based investing involves identifying characteristics in a group of securities that help explain its risk/return profile.
For example, value investing is a factor-based strategy that focuses on a subset of stocks that displays attractive valuation metrics relative to the general market.
Thanks to smart beta, investors today can gain exposure to this factor and a wide array of others with ease, in a transparent and low cost vehicle.
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