Recently, I came across the term ‘factor-based’ investing and decided to take a deeper look on whether this strategy could be applied to my investment portfolio.
Factor-based or risk-weighted investing is a diversification strategy that determines how one should allocate stocks in their portfolio based on ‘factors’ in order to achieve higher returns. The strategy can be used together with a passive investing strategy to form what is known as the Smart Beta strategy. The strategy is touted as the combination of both passive and active investing strategy having the best of both worlds. Traditional investment strategy involves diversification across different asset classes and these asset classes are driven by multiple risk and return factors. Factor-based investing focuses on these factors rather than the asset class itself as the each class could be driven by multiple factors. There could also be overlapping factors across different classes. Therefore, factor-based investing is