By: Marchello Holditch, CFA
Vice-President, Multi-Asset Management
If you pass white light through a prism, the light separates and you can see that white light is made up of many different colours. I like to picture rock band Pink Floyd’s album cover for The Dark Side of the Moon. Now, think about your portfolio as white light. If you pass the “white light” of your portfolio through a factor lens, you’ll see that your portfolio is made up of many different factor exposures.
Factors are one of the underlying drivers of portfolio returns. For example, a portfolio with stocks that exhibit positive momentum in earnings and price is exposed to the momentum factor. Portfolios with stocks that have low price-to-earnings ratios are exposed to the value factor. A large range of other factors have also been analyzed and debated in academic literature. Factor-based investing simply means considering factor exposures when constructing portfolios.
Today, exchange-traded funds (ETFs) can be effective tools to gain exposure to different factors.
Read the rest of the article here >>September 2018