Displaying items by tag: factor investing

Factor investing builds portfolios using characteristics such as value, momentum, quality, volatility, or size that have historically improved returns while reducing risk. Though not new globally, long used by institutional investors, it has recently become more accessible to everyday investors through rule-based mutual funds and ETFs. 

Factor investing is still a prominent strategy, with single-factor and multi-factor strategies designed to balance performance and reduce reliance on any one factor. 

The approach offers transparency and lower costs compared to traditional active management, since decisions follow algorithms rather than human judgment. However, factor strategies carry risks, including the possibility that past patterns may not persist and that widespread adoption can reduce their effectiveness. 

Finsum: Ultimately, factor investing is likely here to stay, and is a time tested investment strategy.’

The industry is entering a new macro environment that challenges long-standing assumptions about returns, inflation, diversification, and governance. After decades in which strong returns and easy diversification masked deeper structural risks, asset owners now face a paradigm where high valuations and slower economic growth may limit future returns. 

Inflation appears contained in the short term, yet structural forces such as deglobalization and rising public debt suggest it remains a long-run risk that investors must manage more deliberately. These shifts elevate the importance of real returns and purchasing-power protection as core objectives for DC plans, endowments, sovereign wealth funds, and retirement savers. 

They also imply that traditional diversification is less reliable than it once was, requiring new approaches to allocating across asset classes and seeking differentiated return streams.

Finsum: In this environment, multi-asset investing becomes inherently active, demanding broader use of private markets.

Free cash flow (FCF) is a critical measure of financial health, showing how much cash a company can reinvest or return to shareholders after covering essential costs. In the small-cap arena, where profitability is often limited, strong FCF can distinguish higher-quality businesses with better growth prospects and lower valuation risk. 

The VictoryShares Small Cap Free Cash Flow ETF (SFLO) seeks to capture this advantage by tracking an index that emphasizes both historical and projected FCF performance. By filtering out slower-growing firms and prioritizing those with robust FCF yields, SFLO aims to balance growth potential with disciplined valuation.

 Its broad small- and mid-cap universe also enhances liquidity and diversification, making it a potentially appealing option for investors seeking targeted small-cap exposure with a quality bias.

Finsum: Since a large share of small-cap companies remain unprofitable, focusing on those with consistent FCF can improve portfolio stability.

Bank of America is urging investors to focus on high-quality value stocks as markets show signs of overheating and sentiment shifts toward more defensive strategies. In its Small/Mid Cap Factors report, the bank noted that while small-cap value stocks lagged in the third quarter, they are now positioned for a rebound. 

Analysts pointed to several signals suggesting stronger prospects for value stocks, including the U.S. Regime Indicator’s recent shift to a “Recovery” phase, historically favorable for value leadership.

The report also emphasized that value stocks tend to outperform during Federal Reserve rate-cut cycles, similar to the current environment. Bank of America highlighted that value has started to outperform in mid caps, even as growth stocks continue to rally, noting that the “low-quality rally is in its later innings.” 

Finsum: Turning to fundamentals could be the play with rate cuts on the horizon and an shaky economy. 

The most successful macro investors don’t rely on predictions, they rely on true diversification. Rather than attempting to forecast markets, they construct portfolios of uncorrelated or negatively correlated assets that improve returns without adding risk. 

When multiple asset classes move independently, investors can use modest leverage to amplify gains while maintaining controlled volatility. This approach allows a portfolio with the same 5% volatility to generate higher expected returns simply by expanding exposure across uncorrelated assets. 

However, the strategy requires vigilance, as correlations can shift suddenly, undermining diversification’s benefits. 

Finsum: The foundation of long-term macro success lies in true diversification, careful leverage, and disciplined risk management.