Sponsored by Fidelity Investments
The merits of factor investing, which may include enhancing returns, managing risks, and/or targeting specific investment outcomes, have been supported by academic research and empirical data over the years. This paper explores the potential benefits of combining equity factors and fine-tuning factor allocations to target specific outcomes or investing styles, such as capital appreciation, downside protection, and income.
- When building portfolios with factors, investors can harness the risk and return characteristics of the individual factors themselves and achieve diversification by combining them.
- A portfolio of six equity factors weighted equally can exhibit compelling results, including positive excess and higher risk-adjusted returns relative to the broader equity market.
- Equity factor allocations may also be fine-tuned to target specific outcomes, such as capital appreciation, downside protection, and income.
- Factor combinations can be used to create a core equity portfolio from the ground up, or to complement existing holdings.
There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how factor investing strategies may differ from more traditional index products. Depending on market conditions, factor-based investments may underperform, potentially for extended periods of time, compared to products that seek to track a more traditional index.
Fidelity Investments Institutional Services Company, Inc., and Informa are not affiliated.
FIDELITY INVESTMENTS INSTITUTIONAL SERVICES COMPANY, INC.