Factor Exposure

The most-used factors

• Market — the original factor, beta to the broad market.
• Value — exposure to cheaper securities by valuation metrics (P/B, P/E, P/CF).
• Size — small-cap vs. large-cap exposure.
• Momentum — recent winners vs. losers.
• Quality — profitable, stable, low-leverage companies.
• Low volatility — securities with lower historical volatility.
• Term — interest-rate duration in fixed income.
• Credit — credit-spread exposure in fixed income.

Why factor exposure matters in portfolio construction

1. Two portfolios with similar asset-class exposure can have very different factor exposures and very different return paths.
2. Many "actively managed" funds have factor tilts that explain most of their return — useful information when evaluating fees.
3. Diversification across asset classes does not necessarily mean diversification across factors.
4. Concentrated factor exposure (e.g., a portfolio loaded with momentum) creates non-obvious drawdown risk in factor-rotation periods.

Factor exposure and compliance

The SEC's focus on suitability includes whether a portfolio's actual risk profile matches the client's stated tolerance. A portfolio with heavy momentum or small-cap factor exposure may have very different drawdown characteristics than the client expects. Documented factor analysis at the portfolio level is a defensible way to show the firm is monitoring risk beyond simple asset-class buckets.

How StratiFi thinks about factor exposure

Factor analysis is most useful when it's a conversation tool, not a research artifact. Showing a client that their portfolio is heavily tilted toward, say, low-volatility quality stocks — and what that means for behavior in a momentum rally — is a different and richer conversation than discussing equity allocation alone.