Factor Investing

What is a factor?
A factor is a quantifiable characteristic of a financial asset that to a large extent explains the risk-return profile of a portfolio. Factors — such as volatility, momentum, quality, value, small size and dividend yield — provide an academically proven investment approach to help drive outperformance across asset classes.

Why factor investing?
Factor investing allows investors to look deeper than sectors, geographies and investment styles and beyond active and passive strategies. Seeking exposure to particular factors can help you target a range of portfolio outcomes, from reducing risk and enhancing returns to generating income. More investors are discovering the power of factor-based strategies to help improve risk-adjusted trade-offs and build truly diversified portfolios.

Why PowerShares?
As a smart beta pioneer with 14 years of factor leadership, PowerShares by Invesco has one of the broadest factor suites using some of the most recognized index providers in the industry. We offer:

  • Single- and multi-factor ETFs focused on low volatility, momentum, quality, value, size and dividend yield
  • 95+ smart beta ETFs, 65+ with a 5+ year track record
  • $45B in smart beta ETF assets
  • 50+ smart beta ETFs with over $100mm AUM

Low volatility in focus

We believe managing the impact of volatility is critical when pursuing long-term investment goals — that's why PowerShares offers the industry's largest suite of S&P Low Volatility ETFs, so you can choose the strategy that's right for your needs.

A core allocation to low volatility might help:

  • Buffer portfolios during down markets
  • Provide growth during up markets
  • Generate attractive returns across full market cycles

In the current market environment, many might consider an amplified allocation to low volatility.

To further explore the opportunity for low volatility investing

Visit our strategy page to gain insight into the methodology, click here.


Build a low volatility core using ETFs:

Momentum in focus

Investors tend to either over or under react to market events, commonly referred to as "herding". The momentum factor seeks to capitalize on the market inefficiencies caused by this phenomenon, ranking stocks by relative performance then selecting and weighting stocks based upon their past performance (price momentum).

A core allocation to momentum might help:

  • Enhance return when markets show signs of changing rates and strong dollar*
  • Compliment or replace an allocation to growth
  • Generate attractive return across full market cycles

Add momentum to your core:

*In declining, flat and rising 10 – year interest rate environments the momentum factor historically provided annualized excess return over the S&P 500 Index by 4.2%, 2.2% and 2.8% respectively. In strong dollar environments the momentum factor historically provided annualized excess return over the S&P 500 Index of 4.7%. Download the white paper for more information. Past performance cannot guarantee future results. An investment cannot be made in an index.

Source: FactSet Research Systems as of Dec. 31, 1991 through June 30, 2015

The momentum factor is represented by the top 20% of stocks with the highest 12-month price return of the market-cap-weighted S&P 500 index.

Flat 10-year interest rate environments are when rates have changed by less than 0.4%.

Rising 10-year interest rate environments are when rates have increased by 0.4% or more.

Declining 10-year interest rate environments are when rates have declined by 0.4% or more.

Strong dollar environments are periods when the US dollar increased in value against a basket of currencies encompassing the euro, Canadian dollar, Japanese yen, British pound, Swiss franc and Swedish krona.

Quality in focus

When markets become volatile, investors historically may choose to "flee to high-quality" or cash. However, maintaining a long-term allocation to quality stocks may be a better approach.

The rationale for quality stocks include:

  • Strong fundamentals – Quality stocks are typically issued by companies with strong balance sheets and stable earnings growth
  • Added risk mitigation – Quality stocks have historically outperformed lower-quality shares during periods of escalating market volatility. (Similarly, quality stocks can lag during periods of falling market volatility.)*
  • Balance sheet focus – Considers often-overlooked balance sheet metrics that can be important drivers of stock returns

Add quality to your core:

*In high volatility environments the quality factor historically provided annualized excess return over the S&P 500 Index based on the level and direction of the VIX Index by 4.2% in low volatility environment (but increasing), 4.9% in high volatility environment (and increasing) and 5.4% in high volatility environment (but declining). Download the white paper for more information. Past performance cannot guarantee future results. An investment cannot be made in an index.

Source: FactSet Research Systems as of Dec. 31, 1991 through June 30, 2015

The quality factor is represented by the top 20% of stocks with the highest return on equity in the market-cap-weighted S&P 500 index.

The VIX Index represents the CBOE Volatility Index® (VIX®) which measures near-term volatility expectations.

High volatility environment is when VIX is above 20.

Low volatility environment is when VIX is below 20.

Value in focus

Negative news can cause some investors to overreact and sell out of fundamentally strong positions. This can lead to dislocations in stock prices, providing an opportunity to "make a value play" that seeks to capture excess return should stocks revert back to their intrinsic value.

A core allocation to value might help:

  • Implement a value play, systematically
  • Enhance return when economic cycles create mis-pricing
  • Generate enhanced absolute and risk-adjusted return across market cycles

Add value to your core:

Size in focus

Consider smaller companies for a source of potential excess return as they may grow faster than large companies and the overall economy. In addition, small cap companies may offer a return premium due to increased risk and reduced liquidity relative to large cap companies.

A core allocation to small cap might help:

  • Generate enhanced absolute and risk-adjusted return
  • Diversify away from large cap stocks
  • Provide multi-factor exposure when combined with other factors

Add size to your core:

Dividend yield

With a bias toward growth, many investors can overlook slower growing dividend paying companies as a source of yield. Some investors also tend to favor traditional fixed income over stocks for their income allocations. But a company's ability to grow dividends may be an indication of strong underlying financial health and a harbinger of total excess returns.

A core allocation to dividend yield may:

  • Generate excess absolute and risk-adjusted returns across full market cycles
  • Provide an opportunity to earn yield above sovereign debt and benefit from a falling rate environment
  • Offer multi-factor exposure when combined with factors like momentum, value or size

Add dividend yield to your core:


Beta is a measure of risk representing how a security is expected to respond to general market movements.

Smart Beta represents an alternative and selection index based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both in active and passive vehicles. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk.

Factor investing is an investment strategy in which securities are chosen based on attributes that have been associated with higher returns.

Return on equity (ROE) is net income divided by net worth.

Volatility is the annualized standard deviation of index returns. There is no guarantee the funds will provide low volatility.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Underlying Index.

Certain funds are considered non-diversified and may be subject to greater risks than a diversified fund.

The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.

The momentum style of investing is subject to the risk that the securities may be more volatile than the market as a whole, or that the returns on securities that have previously exhibited price momentum are less than returns on other styles of investing.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock market.

Certain funds are non-diversified and may experience greater volatility than a more diversified investment.

Investing in securities of small capitalization companies involves greater risk than customarily associated with investing in larger, more established companies.

Diversification does not guarantee a profit or eliminate the risk of loss.

Note: Not all products are available through all firms