How to Implement a Factor-based Smart Beta Investing Strategy
At the heart of smart beta investing is the notion of re-writing investment rules to seek to improve investment outcomes by targeting exposures to intuitive, well understood investment ideas - what quants would call factors. You might think of factors as the DNA of a stock or bond: the characteristics that help explain its behavior over time, just like the chromosomes that govern a person's creative ability or the color of their eyes.
Focusing on four factorscorrelation
- Single factor strategies: Tactically minded investors may find single factor strategies a useful tool to express their views. Indeed, the cyclicality and low correlations among factors make single factor strategies a potential way to alter their portfolio's factor DNA and express investment ideas. iShares Factor ETFs, such as MTUM , VLUE , QUAL and SIZE allow investors to tailor factor exposures and implement specific views or control portfolio exposures along factor dimensions.
- Multi-factor strategies : For the less tactically minded, a strategy that invests across multiple factors can provide a diversified approach. While each factor strategy may be individually compelling, they may be even more compelling when combined together as a result of their low correlations with each other.
The take away?Sara Shores is Global Head of Smart Beta for BlackRock. You can read more of her posts here .