Factor investing is a systematic investment approach between active management and passive index investing. Its core premise: certain characteristics (factors) can systematically predict stock excess returns, backed by economic logic rather than random data mining.
## Four Classic Factors: Principles and Mechanisms
**Value Factor**: low P/B and P/E stocks outperform high-valuation stocks long-term. Academic explanation: value stocks are often distressed companies; investors holding them bear higher fundamental risk and receive risk compensation. Behavioral finance also offers an explanation (investor overoptimism on growth stocks, overpessimism on value). The 1992 Fama-French paper is the academic milestone.
**Momentum Factor**: stocks with strong relative performance over the past 3-12 months tend to continue outperforming over the next 3-12 months. Jegadeesh and Titman (1993) first systematically documented this. Behavioral explanation: investor underreaction to positive information and herding effects amplify trends. Note: momentum factors can produce extreme negative returns during “Momentum Crashes” (e.g., massive momentum strategy losses after the March 2009 market reversal).
**Quality Factor**: companies with high ROE, low use, and high earnings stability outperform long-term. Intuitive explanation: high-quality companies’ competitive advantages (moats) are sustainable; intrinsic value continuously grows; markets often underestimate their persistence.
**Low Volatility Factor**: stocks with low historical volatility deliver superior long-term risk-adjusted returns — contradicting standard financial theory (higher risk = higher return). Known as the “Low Volatility Anomaly.”
## Smart Beta ETFs: Factor Tools for Ordinary Investors
Smart Beta ETFs systematically expose to single or multiple factors through rule-based methods, at far lower fees than active management funds. Domestic representative products: Dividend Factor ETF (e.g., 510880 SSE Dividend ETF), Value ETF, Quality ETF. MSCI, Russell, and FTSE indices also provide various factor indices for institutional and high-net-worth investor reference.
See [Quantitative Investing Intro](https://sunqi.org/quantitative-investing-intro-en/) and [AQR factor research](https://www.aqr.com/Insights/).
