Factor investing provides the benefits of diversification, which minimizes a portfolio’s exposure to risk. Factors can improve diversification because style and macroeconomic factors cover various situations in the economic cycle.
Factor investing is also associated with the benefits of high returns because the strategy follows a stock’s traits that have historically generated positive earnings. For example, empirical evidence suggests that following a quality-based factor investing approach generates positive returns, as investors put their money in financially healthy companies.
Therefore, investing in assets that use the factor investing approach can help enhance returns, reduce risk, and improve diversification.