A Smoother Path to Outperformance with Multi-Factor Smart Beta Investing

Researchers have identified hundreds of factors that purport to predict equity returns; we find a half dozen that provide an opportunity to outperform the market. To maximize risk-adjusted returns, diversify across smart beta strategies that access the value, low beta, profitability, investment, momentum, and size factors. Systematic rebalancing to fixed weights—reducing exposure to popular factors that have outperformed over recent years, while increasing exposure to the out-of-favor factors that have underperformed—in a portfolio of smart betas will likely improve performance relative to a buyand-hold weighting. Dynamically rebalancing factor exposures using short-term momentum and long-term reversal signals further improves the return.