Understanding Factor Investing

Factor investing aims to achieve higher returns than traditional market investments by focusing on specific characteristics of securities, such as size, value, and profitability. Unlike index fund investing, which seeks to replicate market benchmarks, factor investing involves strategically selecting and overweighting certain securities to potentially yield better investment returns. Historical data supports this strategy, showing significant average return premiums of 2% to 4% per year for small-cap and value stocks. However, capturing these premiums in real-world scenarios is complex and requires a thorough understanding of portfolio design, management, and trading.