As I write this blog, it’s October, and the Major League Baseball playoffs are in full swing. Perhaps more than any other sport, baseball is famous for statistical analysis, and there are seemingly endless ways to evaluate every player. Similarly, there are many ways to evaluate stocks, and different portfolio managers assemble their “teams” using a variety of methods. To understand the differences, consider the ways that coaches can choose players for a baseball team.
- Factor strategies
Factors are measurable characteristics that can affect performance. In baseball, this can include stats such as stolen bases, batting average and on-base percentage. In equity investing, factors include value, size, momentum, low volatility, quality and dividend yield.
All athletes have intrinsic talents that are reflected in their stats. Similarly, equity investors already have exposure to factors that are inherent in stocks. Factor-based strategies, which can be index-based or actively managed, incorporate this knowledge into the selection process:
- Single-factor. Pitching coaches try to recruit the best hurlers for their bullpen, and may concentrate on a single statistic, like strikeouts. Similarly, a single-factor strategy will screen securities for just one factor.
- Multi-factor. The head coach could evaluate players based on several factors and build their team based on all of them. This is similar to the way that multi-factor strategies are built, giving diversified exposure to multiple investment factors within a portfolio.
- Fundamental active strategies
In addition to analyzing each player’s statistics, a coach could also conduct player interviews and assess which players seem to have the best attitude and the most “team chemistry.” Those non-statistical measures could influence their decision, as they search for the potential stars that others have overlooked. In the same way, fundamental active managers, in general, can consider both qualitative and quantitative information when building portfolios.
- Traditional market-cap-weighted strategies
Finally, a coach could accept every player who passes a basic physical. This is like a traditional market-cap-weighted passive strategy that simply provides exposure to the broad market.
What now? Three key takeaways
Fortunately, you don’t have to pick just one option when building a portfolio. Like different baseball players, each option has strengths and weaknesses. You can include fundamental active, market-cap-weighted and factor-based strategies, based on your investment objectives.
- Use Invesco’s interactive tool to see how adding a factor strategy to a traditional benchmark (the S&P 500 Index) can affect risk and return.
- See Invesco’s list of factor-based exchange-traded funds.
- Financial professionals: Contact value, size, momentum, low volatility, quality and dividend yield for a Custom Portfolio Analysis, to see your factor exposures and much more.
Blog header image: David Lee/Shutterstock.com
Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes.
An investment in exchange-traded funds (ETFs) may trade at a discount to net asset value, fail to develop an active trading market, halt trading on the listing exchange, fail to track the referenced index, or hold troubled securities. ETFs may involve duplication of management fees and certain other expenses. Certain of the ETFs the fund invests in are leveraged, which can magnify any losses on those investments.