Factors at work

Factors at work

Helping build resilient portfolios


Often referred to as the foundation of investing, factors are well established, broad, persistent drivers of return. Extensive research conducted over decades, including that of Nobel prize winners, has demonstrated that certain factors have driven excess returns. There are three main reasons why factors persist:

1. Rewarded risk: Some factors, such as value, size and momentum, earn additional returns because they involve bearing additional risk. Investors are compensated for taking on high risks.

2. Structural impediments: Factors like low volatility arise from structural impediments that investors face. Those investment restrictions or market rules that make certain investments off limits for some investors, might create opportunities for others who can invest without those constraints.

3. Behavioural bias: Some factors capture market anomalies caused by investor behaviour, that is, actions of the average investor that are not always perfectly rational. These behavioural biases can give rise to investment opportunities for those who can take a contrarian view. Many factors like quality, value, momentum, and low volatility benefit from investors’ behavioural biases.

Taking advantage of the factors

Factor investing was not always easy. In the past, one had to analyze piles of company financial statements and hand-pick companies that exhibit such traits. Today, new technologies and improvements in data sources are allowing investors to access factors with ease, particularly through exchange-traded funds (ETFs), which provide an efficient, low cost, and transparent vehicle for factor investing.

As investors look across a range of solutions to achieve their investment objectives, factor investing is playing an integral role in this evolution, allowing investors to implement their market views, tilt portfolios, capture return potential, or diversify risk.

To better understand how to consider implementing these in a portfolio, we’ve highlighted some single factor strategies to consider:

Quality: Provides exposure to companies that are financially healthy based on high profitability, stable earnings, and low financial leverage.

Momentum: Provides exposure to companies with strong recent price performance, otherwise seen as having “momentum.” The stocks are scored based on risk-adjusted performance.

Value: As the name suggests, this strategy aims to provides exposure to companies that offer good value or are inexpensive relative to fundamentals. These would typically be selected based on price-to-forward earnings, price-to-book value, and enterprise value-to-cash flow from operations.

Size: Provides investors an opportunity to gain exposome sure to smaller, more nimble companies.

Minimum volatility: Designed to help investors weather the ups and downs of the stock market, by providing exposure to the broad market, but with the potential for less risk.

Over a long-time horizon, certain factor strategies have delivered outperformance relative to the overall market1. In the short term however, such factor performance has been cyclical. Quality and low volatility strategies tend to perform better at the peak of an economic cycle or at the beginning of an economic slowdown. Value and size factors are pro-cyclical, favouring the economic recovery and expansion stages of the cycle. As factors can experience prolonged periods of performance deviation from the broad market, investors should carefully examine their suitability when considering single factor strategies.

As the foundation of portfolio returns, we see tremendous room for growth in this category.

1. “Foundations of Factor Investing,” MSCI, December 2013

Steven Leong, CFA, is Director, Head of iShares Product and Markets, BlackRock Canada. This article first appeared in the Fall 2019 issue of Your Guide to ETF Investing, published by Brights Roberts Inc. Reprinted with permission.

Visit www.RBCiShares.com to learn more about our full factor line up.

Notes and Disclaimer

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. Past performance is not necessarily indicative of future performance.” RBC iShares ETFs are comprised of RBC ETFs managed by RBC Global Asset Management Inc. and iShares ETFs managed by BlackRock Asset Management Canada Limited (“BlackRock Canada”). Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.