What Is Factor Investing? How Today's Investors Construct Their Portfolios

Investing With Style

Let’s talk about investing with a bit more finesse. You’ve probably heard of dumping your money into an S&P 500 fund and calling it a day. It’s simple, it’s solid, and it works for a lot of people. But what if there’s a way to tweak that approach—still keeping things straightforward but aiming for a bit more juice out of your investments? That’s where factor investing comes in, and it’s got my attention as a way to play the market a little smarter.

So, what’s factor investing? It’s like picking the best players for your fantasy football team based on stats that predict success, not just gut feelings. Instead of betting on individual stocks or the whole market, says Gregory Blotnick, founder of Valiant Research, you focus on specific traits, or “factors," that history shows tend to outperform over time. It’s not about chasing hot stocks; it’s about zeroing in on characteristics that give you an edge.

Factor Examples

Think of factors as the DNA of stocks that make them more likely to shine. Decades of research (and real-world results) have pinpointed a few that stand out. Here’s the lineup:

VALUE: These are the bargain-bin stocks—cheap compared to their earnings or assets. The idea? Undervalued companies eventually get their moment in the sun.

MOMENTUM: Stocks on a hot streak tend to keep climbing. This factor rides the wave of price trends.

QUALITY: Think of these as the rock-solid companies—strong balance sheets, steady profits, and businesses that just hum along nicely.

SIZE: Smaller companies (aka small caps) can pack a punch with higher returns over time, though they’re a bit wilder to ride.

LOW VOLATILITY: These are the steady-Eddie stocks—less roller-coaster action, solid returns, and a smoother ride.

Mix a few of these together, says Blotnick, and you’ve got a portfolio that’s not banking on just one trick to win.

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Why Bother With Factors?

Factor investing feels like the lovechild of passive and active investing. It’s got the discipline of index funds (clear rules, no emotional stock-picking) but the ambition of active strategies (targeting what works best). Here’s why it’s catching on with everyone from big institutions to regular folks like us:

STRAIGHTFORWARD: Factor strategies are rules-based, so you know exactly what you’re getting—no mysterious “genius” fund manager needed.

HEDGES POSSIBLE: By leaning on different factors, you’re not putting all your eggs in one stock or sector basket.

QUANTITATIVELY PROVEN: These factors aren’t just theories...they’ve beaten plain-vanilla market indexes over decades in many cases.

Different factors shine at different times. Value might crush it when markets are recovering; momentum might take the lead in a bull run. A mix of factors helps your portfolio roll with the punches better than a one-size-fits-all fund.

How to Start Factor Investing Without Making It Complicated

You don’t need to be a finance expert or run a hedge fund to get into factor investing. Today, it’s easier than ever thanks to low-cost ETFs that are designed to do the work for you. These funds focus on specific factors like value, momentum, or quality, making it simple to build a smarter portfolio.

Here are a few beginner-friendly ETFs to explore:

VLUE: iShares MSCI USA Value Factor ETF, which targets undervalued large-cap U.S. stocks.

SPHQ: Invesco S&P 500 Quality ETF. Targets high-quality companies with strong financials.

MTUM: iShares MSCI USA Momentum Factor, invests in stocks with strong recent performance.

Before jumping in, take a few minutes to read the ETF’s strategy and holdings. Some funds focus on just one factor, while others combine several for a more balanced approach. Choose one that matches your goals and comfort level.

The Bottom Line: Smarter Investing, Less Guesswork

Blotnick writes that factor investing gives you a way to go beyond basic index funds—without overcomplicating your strategy. Think of it as upgrading your portfolio with more precision and intention, without the need for expensive active managers.

If you’re looking for a way to invest with more purpose and fewer fees, factor ETFs are a great place to start. Do a little research, choose your factors wisely, and let the strategy work for you over time. Your future self—and your portfolio—may be glad you did. For more, visit Blotnick's writing compendium on Authory.