Many investors have used factors as a strategic tool to dial up client portfolios to meet investment objectives for years.

Factor ETFs have democratized  factors, helping investors capture excess returns and manage risk. It’s an approach that leverages research, data, and technology to seek out historical return drivers in portfolios.

This strategy targets securities with specific characteristics such as value, quality, momentum, size, and minimum volatility. By dialling in to these well documented characteristics, which have a strong economic rationale, investors can use factor ETFs to build resilience in portfolios over time.

Factor investing is not new, but the rise of ETFs have helped revolutionise how they are accessed, giving investors outperformance potential and an ability to enter the market with less capital than other active investment options.

Understanding the different factor exposures can help advisers grapple with tactical allocations by linking factor styles to moments in the market cycle. For example, in macroeconomic scenarios with rising inflation and slowing growth, companies with higher quality could be worth considering as investment options.

In Australia, independent financial advisers like Andrew Saikal-Skea regularly turn to factor ETFs to dial up their portfolios.

Factor ETFs give investors access to higher potential expected returns offering a systematic approach, without having to go through each stock looking for a potential winner. They also have the potential to help advisers manage risk and reduce volatility within an investment portfolio.

“I moved to predominantly ETF portfolios, including factor-based ETFs a few years ago,” he tells Professional Planner.

“I favour the approach for clients who want less volatility in their portfolios. This is typically retirement-phase accounts as well as balanced and conservative investors.”