Most investors are familiar with the idea of diversification.

The concept is simple: don’t put all your eggs in one basket. By spreading investments across different asset classes, countries, industries and companies, investors can reduce risk and improve the chances of achieving more consistent returns over time. But there’s another form of diversification that receives less attention: factor investing.

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A factor is a specific characteristic that has historically helped explain why some stocks outperform others. Common factors include value (companies trading at lower valuations compared to fundamentals), momentum (stocks with strong recent performance), quality (profitable companies with strong financial health) and size (companies with lower market-cap that exhibit different risk-return characteristics). Rather than focusing solely on industries or regions, factor investing seeks to identify these underlying drivers of returns.

While many investors think they’re diversified by owning both value and growth funds, those strategies often carry hidden sector bets. For example, traditional value portfolios can become heavily concentrated in financial and energy companies, while growth portfolios often lean toward technology stocks. As a result, returns may be driven as much by sector performance as by the intended investment style. Factor investing attempts to isolate the factor itself while maintaining........

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