N※N

Factor Investing: A Growing Trend or Market Fad?

  //stocks-investing.news-articles.net/content/202 .. tor-investing-a-growing-trend-or-market-fad.html
  Published in Stocks and Investing on Wednesday, January 14th 2026 at 14:57 GMT by The Globe and Mail

Wednesday, January 14th, 2026 - As financial markets evolve, new investment strategies emerge, promising potentially higher returns. Currently, one such strategy gaining traction is factor investing, a concept rooted in historical market data and designed to capture long-term trends. But can investors truly profit from this increasingly popular approach, or is it another fleeting market fad?

What is Factor Investing?

At its core, factor investing isn't about predicting the future. Instead, it's about identifying and exploiting characteristics - or "factors" - that have historically demonstrated an ability to outperform the broader market. These factors are not specific companies, but rather attributes that a company might possess. Think of them as foundational principles that have, over time, tended to reward investors.

Several key factors are consistently highlighted:

• Value: This focuses on identifying companies whose stock prices appear undervalued relative to their intrinsic worth - essentially buying "cheap" stocks. The theory is that these stocks will eventually be recognized and their prices will rise.
• Quality: Quality factor investing prioritizes companies exhibiting financial strength - high profit margins, low debt levels, and consistent earnings. These businesses are generally seen as more resilient during economic downturns.
• Momentum: Momentum strategies capitalize on the tendency of stocks that have performed well recently to continue performing well in the short term. This is often described as "riding the wave."
• Size: The 'size' factor involves investing in smaller companies, which have historically had the potential for greater growth than larger, more established corporations.

The Rise of Factor ETFs

The complexity of identifying and incorporating these factors can be daunting for individual investors. Fortunately, the growth of Exchange-Traded Funds (ETFs) has made factor investing significantly more accessible. Financial institutions are increasingly offering factor ETFs, which provide a diversified basket of stocks that embody a specific factor. For example, a "quality" factor ETF might hold shares of companies known for their strong balance sheets and consistent profitability. These ETFs offer a convenient and relatively low-cost way to gain exposure to these targeted factors without needing to pick individual stocks.

A Bumpy Road Ahead: Risk and Considerations

While the historical outperformance of these factors is compelling, it's crucial to understand that factor investing is not a guaranteed path to riches. Market conditions are cyclical, and periods of underperformance are inevitable. Factors that have outperformed in the past might lag behind in the future. The 'value' factor, for example, has faced periods of significant underperformance in recent years, demonstrating that historical trends aren't guarantees.

Furthermore, factor investing can be a "bumpy ride." Market volatility can impact factor performance, and the strategies themselves can be complex and require ongoing monitoring and adjustment. Investors should be prepared for periods of underperformance and avoid the temptation to react impulsively to short-term market fluctuations.

Incorporating Factor ETFs into Your Portfolio

Given the potential benefits and inherent risks, how can investors strategically incorporate factor ETFs into their portfolios? A key principle is diversification. Rather than relying solely on one factor, consider combining several factors to create a more balanced and resilient portfolio. For instance, an investor might allocate a portion of their portfolio to a value ETF, a quality ETF, and a momentum ETF.

It's also essential to align factor investing with your overall investment goals, risk tolerance, and time horizon. Factor investing is generally considered a long-term strategy, and investors should be prepared to ride out market volatility.

The GlobeAdvisor Perspective

The GlobeAdvisor is launching a series focused on factor ETFs and providing portfolio makeover suggestions. This series aims to provide investors with practical guidance on evaluating and incorporating these ETFs into their investment strategies, recognizing both the opportunities and the potential pitfalls.

Ultimately, factor investing represents a shift toward a more data-driven and systematic approach to investing. While it's not a foolproof solution, understanding the underlying principles and risks can potentially help investors improve their long-term returns.