“Given the impact factors historically have had on performance, we believe factor strategies will become mainstream portfolio holdings in the future,” Ang said.
For instance, the equity style factors of value, momentum, quality and small size have historically outperformed over the long haul. Value refers to those securities that are underpriced relative to fundamentals. Momentum refers to securities with upward trending prices. Quality refers to companies with solid balance sheets and less volatile earnings. Lastly, small size includes a tilt toward smaller or small capitalization companies. Additionally, the volatility factor that favors those with historically lower risk has also been used to help diminish risk in a portfolio.
ETF investors can access individual factor-based, smart beta strategies or through ETFs that combine several factors, called multi-factor strategies.
“Single factor strategies can be used strategically to increase diversification or tactically to take advantage of economic cycles where certain style factors perform better than others,” Ang said. “The style factors value, momentum, quality and size have exhibited low correlated returns, so they can also provide diversified exposure when they are combined in multifactor strategies. Over the long term, combining these factors may produce even more consistent results over time than any individual factor strategy.”