Factor Investing – also known as Smart Beta – is considered a modern strategy between passive and active investing. On the basis of certain factors such as value, momentum or volatility, above -average returns are to be achieved. But what is really behind this approach, how do smart beta-ETFs work-and for whom is it all worth it?
• Investment strategy based on scientifically proven return drivers
• No guarantee for outperformance, but more targeted approach than classic ETFs
• Rather suitable for long -term, disciplined investors with market understanding
What does Factor Investing mean?
Factor Investing is an investment approach in which certain characteristics of shares are used in a targeted manner that can be connected to a higher return in the long term. Instead of simply mapping the market – how classic ETFs do – Factor Investing focuses on titles with certain properties. The most important factors include Value, size, momentum, low volatility and quality. The value factor aims at undervalued shares, Size refers to smaller companies, momentum on stocks with positive price development. Low Volatility focuses on low -fluctuating titles, while quality companies with solid balance sheet and stable profits take into account.
The theoretical basis of this approach comes from capital market research. The so -called Capital Asset Pricing Model (CAPM) was one of the first models that tried to explain returns through a single risk – the market risk. Later models such as the Fama-French ripening factor model expanded this approach and showed that other factors can also systematically contribute to return.
Factor Investing comes in right there: The selection of the titles takes place using firm quantitative rules, not through subjective assessments. It is a systematic middle ground between active and passive investment – with the aim of achieving a better risk -adjusted return.
Smart Beta: The bridge between active and passive investment
Smart beta is a special form of the factor investing, in which factors are systematically installed in index strategies. Unlike classic ETFs, which usually weight the entire market according to the market capitalization, smart beta ETFs rely on alternative weighting methods. The aim is to use certain risk premiums in a targeted manner – for example by overweight value shares or companies with low volatility.
The term “beta” comes from financial theory and describes the market sensitivity of a securities. While classic beta symbolizes passive investments, “Smart” stands for the targeted selection and weighting based on certain rules. Smart beta products should therefore combine the advantages of passive investments – such as transparency and low costs – with the earnings opportunities of active strategies. The selection criteria for smart beta are transparent and regularly -based. An ETF can, for example, contain all shares of an index, but cannot weight them according to the stock market value, but according to key figures such as price-profit ratio (KGV), dividend yield or profit growth. This results in different weights – and with it another risk profile.
Smart Beta is not a guarantee for outdoors. Factors can temporarily underperforms, and the higher complexity carries new risks. Nevertheless, the approach is increasingly popular with institutional and private investors who want to focus on long -term return drivers.
Who is Factor Investing suitable for?
Factor Investing is aimed primarily at investors with a long -term investment horizon who want to systematically rely on scientifically examined return drivers. Anyone who is ready to consciously bring certain market factors into the portfolio and accept temporary weakness phases can benefit from this approach. It is important to understand that individual factors – such as value or momentum – do not work permanently, but can remain behind the overall market. Factor Investing is particularly interesting for private investors if you actively deal with your investment and have a certain level of understanding of the market. Beginners, on the other hand, can quickly be overwhelmed because the variety of factors, strategies and ETF products require a good basic understanding. It is therefore advisable to first familiarize yourself intensively with the basics.
From the point of view of science, Factor Investing is not viewed uncritically. Economists such as Eugene Fama, one of the founders of the model, on which many factor strategies are based, indicate in more recent statements that the theory of efficient markets is a simplified model – not a general truth. Many factors, according to the tenor, may not be permanently stable or too much adapted to past data.
Editor finance.net