What is a factor and how did you choose the factors for the Smart Beta portfolio?
A factor is an attribute of a stock or security that explains the security’s performance (“value” and “momentum” are examples). The underlying research – recognized with two Nobel Prizes (1990, 2013) – demonstrated that a security’s return is determined by the set of risk factors that it is exposed to, rather than its standalone risk (as measured by its volatility).
Out of the hundreds of factors that have been considered in academic research, a small subset have been demonstrated to be robust across time, across geographies, and – in some instances – across asset classes. Smart Beta considers five of these factors: market beta, dividend yield, momentum, volatility, and profitability.
For more details, see our Smart Beta White Paper.
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