Factor Investing in 2026: What the Data Says About Value, Momentum, Size, Quality, and Low Volatility

Factor investing means tilting a portfolio toward stock characteristics that have been linked to higher returns over long periods: cheap stocks (value), stocks that have been rising (momentum), small companies (size), profitable companies (quality), and stocks that move less than the market (low volatility). It is rules-based, usually cheap to implement through ETFs, and backed by decades of academic research.

It also comes with long stretches of disappointment. Every factor has gone through periods of five to fifteen years when it lagged the market, and some premiums have shrunk since researchers published them. This guide covers what each factor is, what the data shows through August 2026, how to combine and size factor tilts, and what they cost.

Where factors come from

The research started with the Fama-French three-factor model (1993), which explained stock returns using the market, size, and value. Mark Carhart added momentum in 1997, and Fama and French added profitability and investment in 2015. Kenneth French publishes the factor returns free in his data library, and the figures below come from it.

There are two main explanations for why a factor might pay. In the risk story, investors are compensated for holding stocks that hurt in bad times: value and small companies tend to suffer most in recessions. In the behavioral story, investors make predictable mistakes, such as underreacting to news, which produces momentum. The explanation matters, because a premium that is payment for risk should persist, while one caused by mistakes may shrink as more money chases it.

What the data shows

The figures are for long-short "paper" portfolios in US stocks, before trading costs, taxes, and fees. A long-only fund captures only part of each premium.

Value

Buying stocks that are cheap relative to book value, earnings, or cash flow. The Fama-French value factor (HML) returned about 5% a year from 1927 through 2006. Then it went through the longest drought in its history: from 2007 through 2020 it lost about 56% cumulatively, as large growth and technology stocks led the market. From 2021 through August 2026 it recovered about 54%, including gains of 22% in 2021 and 32% in 2022, and losses in 2023 and 2024. Over the whole period since 1927 it has averaged about 3.6% a year.

Momentum

Buying stocks that have risen most over the past 6 to 12 months and avoiding those that have fallen most. Momentum has averaged about 6% a year since 1927, the highest of the major factors. Its risk is sudden crashes when markets rebound sharply: in 2009, as beaten-down stocks surged off the bottom, the momentum factor lost about 53%. Momentum strategies also trade more, which raises costs.

Size

Overweighting small companies. The size factor averaged about 1.5% a year since 1927, but roughly zero since 1990. Researchers have found that the size premium is much stronger when combined with a quality or profitability screen, since many of the smallest companies are unprofitable. Most current small-cap factor funds combine size with value and profitability for that reason.

Quality and profitability

Favoring companies with high and stable profits, low debt, and conservative investment. The Fama-French profitability factor (RMW) has averaged about 2.7% a year since 1963. Quality tends to hold up better in market declines, which makes it a common partner for value.

Low volatility

Favoring stocks with low price swings or low beta. Low volatility stocks have historically delivered returns close to the market with less risk, which Frazzini and Pedersen explained in their 2014 "betting against beta" research as the result of investors who cannot or will not borrow to invest bidding up riskier stocks instead. The trade-off: low volatility funds lag in strong bull markets and often concentrate in utilities and consumer staples, which makes them sensitive to interest rates.

The factor zoo and fading premiums

Researchers have published hundreds of factors. Harvey, Liu, and Zhu counted 316 in a 2016 paper and argued that, because so many were tested, a new factor should need a much higher statistical bar to be believed. McLean and Pontiff (2016) studied 97 published anomalies and found returns about 26% lower out of sample and about 58% lower after publication, consistent with investors trading them away.

The practical conclusion: stick to the handful of factors with long records, economic explanations, and evidence across many countries and asset classes, and expect future premiums to be smaller than past ones.

Combining factors

Value and momentum tend to offset each other. In French's data, the monthly correlation between the value and momentum factors since 1927 is about -0.41, and Asness, Moskowitz, and Pedersen found the same pattern across countries and asset classes in "Value and Momentum Everywhere" (2013). Combining them smooths the ride.

How you combine them matters. Holding a value ETF, a momentum ETF, and a low volatility ETF side by side can leave you close to the market: the value fund owns the cheap stocks the momentum fund avoids, and the overlap cancels much of each tilt while you pay three sets of fees. Multi-factor funds that select stocks scoring well on several measures at once usually keep more of the intended exposure. Tools that show a fund's factor loadings, such as portfolio analyzers from fund research sites, can tell you what you actually own.

Sizing the tilt: an illustration of tracking error

The hard part of factor investing is behavioral: staying with a strategy while it lags the market for years. Suppose 30% of a stock portfolio goes to a factor fund that trails the market by 5 percentage points a year for ten years, a pattern similar to value's 2010s. With the market returning 8% a year:

• $1 in the market grows to about $2.16.
• The portfolio, rebalanced annually, grows to about $1.88, roughly 13% less.

That gap arrives slowly and publicly, while every headline says the market is doing well. Investors who sold value funds in 2020 missed the 2021-2022 rebound. Pick a tilt size you would hold through a decade like that.

Costs and taxes

• Fees. Factor ETFs typically charge about 0.15% to 0.30% a year, against about 0.03% for a total market or S&P 500 index fund. On a $30,000 tilt, the difference between 0.25% and 0.03% is about $66 a year, small if the premium shows up.
• Turnover. Momentum and multi-factor funds trade more than cap-weighted funds. ETFs usually avoid distributing capital gains through in-kind redemptions, which makes the ETF form more tax-efficient than mutual funds for these strategies.
• Implementation. Funds tracking the same factor can differ a lot in how they define it, how concentrated they are, and how often they rebalance. Compare index methodologies, not just names.

Direct indexing platforms can also apply factor tilts inside a separately managed account while harvesting tax losses; see our direct indexing guide.

Getting started

1. Build the core with a low-cost total market or S&P 500 index fund; see our index fund guide.
2. Choose one or two factors you understand and believe in, or a multi-factor fund. Value with profitability, or value with momentum, are common pairings.
3. Size the tilt, often 10% to 30% of stocks, based on how much lag you can tolerate.
4. Check the fund's methodology, holdings, and factor loadings, not just its label.
5. Rebalance on a schedule; see our rebalancing guide.
6. Judge results over ten years or more, not one or two.

For systematic strategies beyond factor ETFs, see our quantitative investing guide.

This guide is for informational purposes only and does not constitute investment advice. Factor returns cited are hypothetical long-short US portfolios from the Kenneth R. French Data Library through August 2026, before costs and taxes; past performance does not guarantee future results. Consult a qualified financial advisor before changing your portfolio.