What is factor-based investing?

A factor is a measurable characteristic of a group of securities or stocks that, over time, exhibit certain risk and return features. Building factor-based investment strategies involves screening companies based on well-known characteristics that help explain a security’s risk and return behaviours. Investors can incorporate exchange traded funds (ETFs) to help meet certain objectives over the long term.

 

Six most common style factors

 

Dividend Yield

Seeks excess returns from stocks that have higher-than-average dividend yields.

Low Volatility

Targets securities with lower risk than the broader market, as well as stable earnings.

Quality

Targets companies with stable profitability and cash flows, a lack of excessive leverage or better credit quality.

Momentum

Finds securities with improving fundamentals that have recently outperformed and may continue to do so over the medium term.

Value

Seeks lower-cost securities that are undervalued relative to their intrinsic value.

Size

Seeks the excess returns of smaller firms (by market capitalization) relative to their larger counterparts.

 

Five reasons to consider factor investing for your portfolio

  1. Strategic exposure
    Get strategic with your asset allocation. Investing in certain factors can help offset exposure to downside risk in other assets or help increase exposure to potential upside opportunities over the long term.
  2. Cyclical exposure
    Align your portfolio with current and future cyclical market cycles. Some factors may strengthen your portfolio during the early to mid-cycle phase, while others may help your portfolio benefit from late and recessionary stages in the cycle.
  3. Portfolio construction
    Craft your portfolio from the ground up using a combination of factors that align with your investment goals and risk profiles. Among options for low volatility, dividends or quality, your preferences are a key factor.
  4. Enhanced returns
    Improve long-term performance potential by targeting factors that have historically outperformed broad market indexes.
  5. Risk management
    Reduce concentration risk through an equal active overweight approach to portfolio construction.

 

The Fidelity FactorTM

Factor investing is a meaningful component of our investment capabilities. Fidelity Factor ETFs are outcome-oriented investments with the goal to help you achieve your financial goals, by capturing factor-based opportunities the market may miss.

 

How does Fidelity’s factor approach compare?

 

Passive ETF

 
  • Market-cap weighted approach, little to no research involved in the creation of the product
  • Seeks to track a broad-market index (e.g., S&P 500)
  • Provides exposure to securities within a broad-market index

Fidelity Factor ETF

Active in design.
Passive in execution.

 
  • Uses decades of quantitative research and fundamental analysis to create factor-based indexes
  • Seeks to outperform a broad-market index by tracking a custom-built index
  • Indexed for exposure to factors: dividend, low volatility, quality, momentum and value

Active mutual fund

 
  • Portfolio managers select each investment
  • Seeks to outperform a broad-market index (e.g., S&P 500)
  • Seeks to buy high-performing securities and avoid low-performing securities

 

Consider the following Fidelity Factor ETFs

Fidelity Dividend Factor ETFs

Fidelity Low Volatility Factor ETFs

Fidelity High Quality Factor ETFs

Fidelity Momentum Factor ETFs

Fidelity Value Factor ETFs

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ETF education centre

Gain a deeper understanding of factor investing at the Fidelity education centre.

Visit the education centre