The Five Factors of Smart Beta Investing

Momentum. This factor is generally viewed as the opposite of volatility. A relative strength or momentum strategy picks stocks that have historically outperformed the market as studies show that this outperformance is likely to continue in the short to medium term. Much research has been done on this factor, and it is important to be able to harness momentum in the right market environment.


Quality. The notion of quality has gained steam during the economic recovery and U.S. equity bull market since 2009. Quality focuses on factors such as equity return, leverage ratio, and earnings variability. This factor can exhibit strong returns over time as the companies that fit this mold have consistent track records.

Value. One of the originally identified smart beta factors is value which seeks to identify the disconnect between a company’s stock price and its intrinsic value. Ratios such as price to earnings and price-to-book are used to take advantage of this disconnect.

Size. Smaller capitalization stocks tend to outperform over the long run. The key notion here is that smaller capitalization stocks within a benchmark tend to outperform the larger capitalization stocks within that same benchmark.