Factors such as size, value, and growth have played a part in asset allocation decisions for decades. With the advent of factor indexing, passive investors gained access to a broader range of exposures. Today, investors can access factors both individually and in combination through a range of ETFs, tapping into a world of sophisticated strategies that were once available only via active management.
Global Assets in Factor ETFs (USD Bill.)
Over the long term, factors can offer their own return beyond what the market provides.
Because historically, factors have exhibited relatively low correlations, they can be helpful in diversifying a portfolio.
Factor strategies can help investors achieve specific goals, such as risk reduction over the long-term through diversification or by isolating distinct market characteristics.
Stocks having higher than average dividend yields, accounting for dividend quality.
Stocks with attractive valuations based on value scores calculated using three fundamental measures: book value-to-price, earnings-to-price, and sales-to-price.
Stocks with the lowest relative volatility over a defined time period.
Stocks exhibiting the greatest persistence in their relative risk-adjusted performance.
Stocks with the highest relative quality based on return on equity, accruals ratio, and financial leverage.
Accounts for stock size based on market cap (e.g., large-caps vs. small-caps), or equal weighting, which tilts the index in favor of smaller-sized companies.
S&P Style Indices provide broad exposure and are market-cap weighted. This approach makes them relevant benchmarks for evaluating the skill of active managers, and suitable for those seeking traditional “buy-and-hold” index-linked investments with a tilt toward a particular style.
S&P Pure Style Indices have a stricter definition of growth and value, resulting in more-concentrated style exposures for market participants seeking precise tools. Unlike the standard style indices, they are style-score weighted, and there are no overlapping securities between growth and value.
S&P Enhanced Value Indices measure top-tier stocks by value score, and account for both market cap and value score in their weighting.
In both developed and emerging markets around the world, most factors have historically delivered excess return relative to their benchmarks, as indicated by their 15-year information ratios. Find out how factor strategies perform in Australia, China, and Hong Kong, and learn how low volatility performs around the world.
Source: S&P Dow Jones Indices and/or its affiliates. Data as of December 31, 2020. Total return versions of the indices are used. Charts are provided for illustrative purposes. Past performance is not an indication or guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure for more information about index returns, including hypothetical performance.
Multi-Factor Indices: Combining Factors
While powerful individually, factors also can be used in combination depending on your market outlook and investment objectives. Some common factor combinations include:
Benefits of Multi-factor Indices
Historically, the five core factors have generally exhibited weak correlations. Combining such factors can improve long-term performance and generate more stable excess returns. Because investors aren’t required to make decisions about when to shift among factors, multifactor approaches reduce the risk associated with timing factor exposures.
Source: S&P Dow Jones Indices and/or its affiliates. Data are calculated over the time period January 1996 – December 2020. Index performance based on USD total returns. Charts are provided for illustrative purposes. Past performance is not an indication or guarantee of future results. These charts may reflect hypothetical historical performance. Please see the Performance Disclosure for more information about index returns, including hypothetical performance.
A History of Factor Innovation
A pioneer of factor indexing, we launched our first growth and value indices in 1992 and remain a leading innovator today.
Take a closer look at how the low volatility anomaly has persisted over the past 50 years.
Are multiple factors better than one?
The S&P Style Indices and S&P Pure Style Indices have distinct risk/return characteristics due to their methodological differences.
Look inside a dynamic factor rotation strategy designed to time factors in different phases of the business cycle.
Find out if one of the greatest anomalies in finance holds up across regions.