Equity factor-based investing: A practitioner's guide

25 May 2017 | Portfolio construction


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Factor-based investing isn't new. Investors have looked beyond asset-class categorisations for many years. But some vehicles available to tilt portfolios to specific factors are new, and it can be difficult to keep up with the range of strategies available to those interested in factor-based investing.

This brief, based on research by The Vanguard Group, Inc., explores the historical performance of a few commonly discussed long-only, factor-based equity investment strategies, or factor tilts, and discusses key considerations relevant to choosing equity factor tilts.

Our research details the primary ways investors may choose these investments to potentially achieve certain objectives.

What's "worked"
Weighting securities
Applying tilts

1 Equity factor-based investing: A practitioner's guide. Douglas M. Grim, CFA; Scott N. Pappas, CFA; Ravi G. Tolani; and Savas Kesidis; March 2017.

2 Sources: Putting a value on your value: Quantifying Vanguard Advisor's Alpha. Francis M. Kinniry Jr.; Colleen M. Jaconetti; Michael A. DiJoseph; Yan Zilbering; and Donald G. Bennyhoff; 2016, and Bad Habits and Good Practices. Amit Goyal; Antti Ilmanen; and David Kabiller; 2015.

3 It is important to point out that even single factor-tilted equity vehicles have some unintended positive and negative exposures to other factors. Every stock is influenced by numerous forces. This makes it challenging to design a single-factor product that can completely neutralise sensitivity to other factors. As a result, the equity factor tilt used in this case study changed some of the other factor exposures in the equity portfolio, albeit in a minor way.

For professional investors as defined under the MiFID Directive only. In Switzerland for professional investors only. Not for Public Distribution.

This document is published by The Vanguard Group Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments. It should be noted that it is written in the context of the US market and contains data and analysis specific to the US.


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