An example of factor investing in the real world

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Factor investing has grown in popularity over the past decade or so, and financial institutions have developed products to facilitate factor investing. It’s now possible to buy an exchange-traded fund (ETF) or mutual fund that focuses on a specific factor or a combination of multiple factors.

One example is the Vanguard Small Cap Value ETF (NYSEMKT:VBR). It combines the size and value factors to select stocks that ought to produce market outperformance as a group. It could be used as a counterweight to a total stock market index fund, which is heavily invested in large-cap growth stocks that dominate the market. Consequently, the portfolio is more diversified across factors and should produce better risk-adjusted returns.

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