If you surveyed a thousand different people about which investing factors are the best choice for the individual investor, you’d get a thousand different answers. Some of those answers would be due to personal preferences, while others would be influenced by the actual performance of which factors are performing the best or worst.

In recent years, the ETF marketplace has become littered with factor funds in all shapes and sizes. Factor investing, according to one definition, is an investment approach that targets specific drivers of return across asset classes. As such, factor funds generally can be divided into two basic types: macroeconomic and style.

Before deciding which factors might be best suited for client portfolios, let’s examine a few basic types of factor-focused ETFs.

Market Weight
This is the granddaddy of factor investing, as most of the original market indexes—such as the S&P 500 and Russell 2000—were originally built as performance yardsticks and constructed as market-cap weighted benchmarks. For ETF investors, this means the securities with the largest market capitalization within the underlying index will have the greatest influence on the fund’s performance.

The Dow Jones Industrial Average takes a different tack. Rather than using a market-cap weighting factor, the Dow weights its 30 stock components by stock price. In other words, companies with the highest stock price will have the biggest impact on the Dow’s performance.    

Although some investors with a traditionalist view would hardly consider market-cap weighted ETFs as a category of factor-based investing, those viewpoints are being challenged.

Equal Weight
One way to think about equal-weighted investing might be as a factor-neutral solution. Instead of organizing securities according to their market size, equal-weight ETFs assign all securities within the index the exact same exposure percentage. It’s arguably the most simplistic form of factor investing.

For example, the Invesco S&P 500 Equal Weight ETF (RSP) gives each of the 500 stocks within the index the same 0.20% portfolio weighting. The fund rebalances its holdings quarterly to maintain its equal weighting. This strategy neutralizes the effect of the largest stocks within the index while providing smaller stocks an equal say.

Single Weight
What if you could extract just one financial metric and build an ETF around it? Well, you can and the result is the plethora of single-weight factor ETFs on the market.

One example is the iShares Select Dividend ETF (DVY) that screens the entire U.S. stock market for dividend-paying stocks and assigns weightings based on a company’s annual dividend yield.

Other iterations of single-weight factor ETFs are products that weight a portfolio based upon corporate revenues, earnings, stock price momentum or volatility, along with a stock’s actual style (growth or value). 

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