Understanding Factor Investing
Defensive Factor Strategies
What Is Defensive Investing?
Defensive investing focuses on stocks that exhibit lower volatility, more stable earnings, and stronger risk management during market declines. Often found in sectors like utilities, consumer staples, and healthcare, defensive stocks tend to outperform in bear markets and underperform in strong bull markets.
The strategy is designed to deliver asset exposure with less volatility—particularly appealing to risk-averse investors or those seeking to mitigate portfolio drawdowns.
How It Works
Defensive strategies have the ability to be implemented through fundamental or quantitative screening.
- Security Selection: Emphasis on low-beta, high-quality companies.
- Sector Bias: Overweight in non-cyclical industries that are less sensitive to economic swings.
- Risk Management: Seeks to reduce volatility.
Potential Benefits of Defensive Investing
- Drawdown Mitigation: Historically smaller losses during equity market corrections.
- Volatility Reduction: Lower volatility vs. broad market indices.
- Consistency: More stable earnings and dividend profiles.
- Behavioral Advantage: Helps investors stay invested through market turbulence.
Key Risks
- Underperformance in Bull Markets: May lag in strong market upswings.
- Valuation Stretch: Defensive sectors have the potential to become expensive in risk-off environments.
- Sector Concentration: Lower diversification due to heavy exposure to specific industries.
Defensive vs. Other Factors
Defensive investing is often used in combination with other factors in an attempt to to help balance portfolio risk.
| Feature | Defensive | Momentum | Value |
|---|---|---|---|
| Volatility | Low | Often higher | Moderate |
| Ideal Environment | Bearish or neutral | Trending markets | Recovery |
| Sector Exposure | Non-cyclicals | Mixed | Cyclicals, financials |
| Objective | Capital preservation | Capture trends | Find undervalued stocks |
Source: AQR. For informational purposes only. The comparisons herein are not exhaustive and do not address all relevant features, risks, or considerations associated with the strategies discussed. Investors should conduct their own due diligence before making any investment decision.
Who Typically Uses Defensive Strategies?
- Risk-conscious investors.
- Retirees or income-focused portfolios.
- Allocators seeking capital preservation.
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DISCLOSURES
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus or summary prospectus containing this and other important information, please call 1-866-290-2688 or click here to view or download a prospectus online. Read the prospectus carefully before you invest.
The information contained on this website has been provided solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. The information on this site is directed only at persons or entities in any jurisdiction or country where such access to information contained on this website and use of such information is not contrary to local law or regulation. Accordingly, all persons who access this website are required to inform themselves of and to comply with any such restrictions. Past performance is not a guarantee of future performance.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such.
View definitions of benchmarks and other terms used here.
The investment strategy and themes discussed herein may not be in the best interest of investors depending on their specific investment objectives and financial situation.
Diversification does not eliminate the risk of experiencing investment losses. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
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