The Takeaway
A small number of independent sources of market movement drive the majority of variation in asset returns. These factors have been independently vetted, are robust to different definitions, are supported by strong economic rationale, and have proven persistent across time periods, asset classes, and regions.
The Morningstar Global Factor Indexes deliver strong exposure to their targeted factors with excellent liquidity.
Within equities, several “factors” have been identified that have outperformed the market over long periods or have been associated with superior risk-adjusted performance. They include value, momentum, quality, small size, yield, and low volatility. Their persistence is supported by strong economic rationale, related to either risk or investor behavior. They can be observed with common security characteristics that can be used to analyze and forecast investment returns.
Indexes allow investors to research factors and, through passive investment strategies, access factor premiums in a transparent, efficient, and low-cost manner. Packaging sources of outperformance that active managers have long exploited either knowingly or unknowingly, rules-based factor strategies have gained considerable market traction. Yet, differences in selection rules, weighting schemes, and constraints mean that indexes targeting the same factor can diverge to a far greater extent than beta benchmarks representing the same market segment. Factor index design must strike a balance between purity of exposure and investability.
The Morningstar Global Factor Indexes aim to deliver strong exposure to industry-standard factors, with high investment capacity, low transaction costs, and constraints to mitigate unintended sector and regional bets. The indexes follow a consistent design framework and are powered by transparent rules. They can be used for research, benchmarking, and investing.
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