Understanding Factor Investing
What Are Factors (Styles)?
Factors, also referred to as styles or themes, are systematic investment strategies that target specific drivers of equity performance. Grounded in decades of academic research, these factors offer investors a way to capture consistent and repeatable return premiums through disciplined, rules-based approaches.
Rather than investing in individual securities based on discretionary views, factor-based strategies focus on quantifiable traits like value, momentum, or quality. These approaches are often used in factor investing, so-called smart beta strategies, and quantitative asset allocation models.
Why Factors Matter
Factor investing enables investors to build portfolios that are diversified not just by asset class or geography, but by the underlying drivers of return. Incorporating multiple styles in the investment process has the potential to:
- Improve risk-adjusted returns.
- Reduce drawdowns across market cycles
- Capture well-documented market anomalies.
- Provide transparency and repeatability in investment process.
Common Factors, Explained
Here are the most widely recognized factors, each with distinct characteristics and potential benefits:
Value
Value strategies involve buying stocks that appear undervalued based on fundamental metrics like price-to-earnings or price-to-book ratios. These stocks are expected to revert to their intrinsic value over time.
Momentum
Momentum strategies involve investing in stocks that have shown strong recent performance, on the premise that trends tend to persist in the short to medium term.
Quality
Quality investing targets companies with strong fundamentals, such as high profitability, strong balance sheets, and consistent earnings. These companies are typically less susceptible to economic shocks.
Multi-Factor
Multi-factor strategies combine multiple investment styles—such as Value, Momentum, and Quality—within a single framework. These strategies leverage diversification and advanced modeling with proprietary signals. Multi-factor strategies seek to deliver robust, all-weather performance.
Explore Multi-Factor Investing →
Low Volatility
Low volatility-based strategies focus on stocks with low historical or forecasted volatility. These strategies may deliver attractive risk-adjusted returns and greater risk mitigation.
Explore Low Volatility Factor →
Defensive
Defensive strategies combine Quality and Low Volatility, focusing on stable companies that tend to perform well during market downturns and periods of heightened uncertainty. These stocks often belong to sectors like consumer staples, healthcare, and utilities.
How to Use Factor Investing in a Portfolio
Factor investing has the ability to serve different roles depending on the investor's objectives and risk tolerance:
- Core Allocation: Use as a foundation of a diversified portfolio.
- Tactical Tilt: Overweight certain factors based on macro conditions or market cycles.
- Volatility Management: Use Defensive or Low Volatility strategies to reduce drawdowns.
- Return Enhancement: Combine Value, Momentum, and Quality for long-term growth.
Explore the Factors
Dive deeper into each equity factor to see how it may be able to support your long-term investment strategy:
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.
© AQR Funds are distributed by ALPS Distributors, Inc. AQR Capital Management, LLC is the Investment Manager of the Funds and a federally registered investment adviser. ALPS Distributors is not affiliated with AQR Capital Management.