Is factor investing worth it? The 5 key factor premiums tested

The overall market beats most active fund managers. But is there a passive strategy that can outperform the overall market in the long run? That is exactly what factor investing promises. We present the five best-documented factor premiums and show which ones really deliver – and which ones disappoint in a long-term comparison.

What is factor investing?

Factor-based investing, smart beta investing or simply factor investing is an investment strategy that focuses on securities with certain characteristics – so-called factors. Numerous scientific studies, often covering periods of several decades, show that these factors have led to higher returns in the past. Factor-based investing therefore means deliberately overweighting factor premiums in a portfolio compared with a market-cap weighting. A market-cap weighting reflects the overall market according to market capitalisation and is the classic among passive investment strategies.

Factor investing is less suited as a complete replacement for a market-cap-weighted global portfolio and more as a targeted addition – in the sense of a core-satellite approach: the core of the portfolio remains a broadly diversified equity portfolio, while factor ETFs are added as satellites. A portfolio made up only of factors carries too much risk: past excess returns are no guarantee for the future, individual factors can be negative for an entire decade, and the stress that comes with it should not be underestimated.

When is something a factor premium?

Finance author Larry Swedroe and other experts have identified the following seven criteria:

1. Confirmation by at least several dozen independent researchers
2. High persistence, i.e. over several decades (the more evenly the factor premium is distributed, the more convincing it is)
3. Global evidence, i.e. not limited to certain countries or sectors
4. Clear filter criterion, i.e. no adjustments to the definition of the factor premium
5. Cost-efficient implementation, i.e. a factor premium should remain even after costs
6. Plausibility, i.e. there is a logical and convincing explanation behind it
7. Uniqueness of the factor premium, i.e. not merely a variation of an existing factor premium

In his standard work “Souverän investieren mit Indexfonds und ETFs”, Gerd Kommer also mentions the following characteristics of factor premiums:

• Factor premiums can fluctuate strongly and cannot be reliably predicted in the short and medium term.
• Factor premiums are not “additive”: it is therefore not possible to simply add up the individual factor premiums in a multi-factor portfolio.
• Most factor premiums weaken after their scientific discovery, but often remain high enough to produce an excess return after costs.
• Factor investing costs more than comparable plain ETFs.
• Factor investing only works statistically, i.e. according to the law of large numbers – not at the level of individual stocks.
• Factor investing is compatible with the efficient market hypothesis (EMH).
• Factor investing can be described as a “more active” variant of “passive” investing. The main features such as cost minimisation, buy-and-hold, a strictly scientific approach and mechanical, rules-based implementation still apply.

The most important factor premiums for equities

Below we present five well-documented factor premiums in the “equities” asset class:

• Size factor: Small companies beat large ones
• Value factor: Cheaply valued stocks beat expensive ones
• Momentum factor: Past winners stay winners
• Quality factor: High-quality companies beat the market
• Political risk factor: Emerging markets as a separate risk premium

To illustrate each one, we compare the relevant MSCI factor index with a suitable benchmark index and show the long-term excess return since launch. Another factor – the investment factor from Fama and French’s five-factor model – is briefly explained under the Quality factor, but is not covered separately due to a lack of suitable ETF products.

Size premium

The small-size effect states that small listed companies (small caps) have statistically higher returns than large ones. The basis for the calculation is a company’s market capitalisation, i.e. its stock market value. Index provider MSCI defines the size categories as follows: the largest companies, which make up 70% of the market capitalisation of an index region, are large caps. The next 15% are mid caps. A further 14% are small caps, while the remaining 1% are micro caps. The median market capitalisation of a small cap in the MSCI World Small Cap Index was still around USD 1.580 billion in February 2026.

In other words, only if you hold more than 14% small caps in your portfolio can you speak of a factor-based investment. That’s because 14% is the market-cap weighting.

The largest position in the MSCI World Small Cap Index as of 27 February 2026 is the US tech company Sandisk.

Is the Size factor worth it?

The data shows a mixed picture: over the long term since December 2000, the MSCI World Small Cap achieved 9.72% p.a., an excess return of around 1.7 percentage points over the overall market MSCI ACWI IMI (8.01%). Over the last 10 years, however, small caps underperformed the overall market by 1.55 percentage points, at 11.77% vs. 13.32% – a vivid example of the long dry spells you have to expect with a factor-based investment.

How to invest in the Size factor

If you want to invest in the Size factor, the following two products in particular have become well established on the market:

• iShares MSCI World Small Cap UCITS ETF Acc | IE00BF4RFH31
• State Street SPDR MSCI World Small Cap UCITS ETF USD Unhedged (Acc) | IE00BCBJG560

The iShares ETF was launched in March 2018, has a much larger fund size of CHF 5,916 million and impresses with a lower TER of 0.35% p.a. compared with 0.45% for the State Street product. The iShares fund is also slightly ahead in performance since March 2018, at +49.90% vs. +47.64%. The State Street ETF’s only advantage is its longer track record since November 2013. Transparency note: we are invested in the iShares product ourselves.

Value premium

In the scientific sense (and not stock picking à la Warren Buffett), value stocks have a particularly low share price relative to their fundamentals. This undervaluation is usually measured using the price-to-book ratio (P/B), the price-to-earnings ratio (P/E), the dividend yield and free cash flow.

The largest position in the MSCI World Value as of 27 February 2026 is – quite surprisingly – Google’s parent Alphabet. Despite its growth character, the tech giant counts as a value stock thanks to a price-to-earnings ratio (P/E) that is relatively low compared with its industry.

Is the Value factor worth it?

The data paints a sobering picture: over the last 15 years, the MSCI World Value has clearly underperformed the market-cap-weighted MSCI World – driven by the dominance of US tech stocks. The long-term comparison since 1974 does show a marginal excess return of 0.38 percentage points (11.61% vs. 11.23%), but that is before costs and taxes. Once you deduct the higher product costs and the extra tax burden from dividend distributions, the premium largely disappears – which is why we remain sceptical about the Value factor.

How to invest in the Value factor

If you still want to invest in the Value factor, the following two products are worth a look:

• Xtrackers MSCI World Value UCITS ETF 1C | IE00BL25JM42
• iShares Edge MSCI World Value Factor UCITS ETF | IE00BP3QZB59

Both ETFs were launched in 2014 and impress with a fair TER of 0.25% p.a. Since launch, the Xtrackers ETF has performed better, at +117% vs. +108% for the iShares product – albeit with a smaller fund size (CHF 3,381 million vs. CHF 4,508 million).

Momentum premium

Stocks that have performed better than the market in the past also deliver higher returns in the near future. Put simply, that is the basic idea behind the momentum premium. It is therefore based on relative returns and includes stocks that have stood out with above-average performance over the last 6 and 12 months.

The largest position in the MSCI World Momentum as of 27 February 2026 is the Californian semiconductor and software company Broadcom.

Is the Momentum factor worth it?

The data speaks for itself: over the last 15 years, the MSCI World Momentum has clearly outperformed the market-cap-weighted MSCI World, at 664 vs. 478 points. In the long-term comparison since 1994, the Momentum factor also impresses with an annualised return of 11.69% compared with 8.90% for the MSCI World – an excess return of 2.79 percentage points over around 32 years. This makes the Momentum factor one of the best-documented factors in research and one of the most convincing in practice.

Bear in mind, however, that the Momentum factor can also go through longer dry spells. During the 2020 COVID crash, both indices lost a great deal of value – but in the recovery that followed, the Momentum index lagged well behind the overall market.

How to invest in the Momentum factor

The choice of momentum ETFs is limited – but the following two products stand out on their key figures:

• iShares Edge MSCI World Momentum Factor UCITS ETF Acc | IE00BP3QZ825
• Xtrackers MSCI World Momentum UCITS ETF 1C | IE00BL25JP72

Both ETFs were launched in 2014 and impress with a fair TER of 0.25% p.a. Since launch, the iShares ETF has performed somewhat better, at +209% vs. +202% for the Xtrackers product – and it also has a much larger fund size (CHF 3,070 million vs. CHF 1,432 million).

Quality premium

Quality stocks typically have three characteristics: a high return on equity (ROE), stable and predictable earnings and low debt. As there is no uniform scientific definition, the exact measurement varies from provider to provider – the MSCI World Quality Index, for example, is based on exactly these three fundamental variables.

Worth mentioning in this context is the investment factor from Fama and French’s five-factor model: it describes the observation that companies with conservative investment behaviour perform better in the long run than aggressively expanding ones. As it is closely related to the Quality factor and there are hardly any dedicated ETF products, we do not treat it as a separate factor.

The largest position in the MSCI World Quality as of 27 February 2026 is Meta – the operator of Facebook, Instagram and WhatsApp.

Is the Quality factor worth it?

The Quality factor impresses with one of the strongest long-term premiums in this comparison: since 1994, the MSCI World Quality has beaten the overall market by 3.15 percentage points a year. Particularly noteworthy is that, thanks to their solid balance sheets and stable earnings, quality stocks tend to be more resilient than the broad market in times of crisis. The premium is well documented in research and is considered more robust than, for example, the Value or Size factor. 

How to invest in the Quality factor

For the Quality factor, you can choose between two convincing products:

• Xtrackers MSCI World Quality UCITS ETF 1C | IE00BL25JL35
• iShares Edge MSCI World Quality Factor UCITS ETF (Acc) | IE00BP3QZ601

Both ETFs were launched in October 2014 and impress with a fair TER of 0.25% p.a. Since launch, the Xtrackers ETF has performed marginally better, at +161% vs. +160% for the iShares product – while the iShares fund impresses with a much larger fund size (CHF 3,587 million vs. CHF 2,109 million).

Political risk premium

This factor premium relates to equities from emerging markets. It is essentially explained as compensation for higher risk, resulting from political instability, corruption or a deficient legal system and lack of separation of powers, among other things.

Unlike the previous factors – Size, Value, Momentum and Quality – Political Risk is not based on the fundamentals of the companies themselves. Selection is based solely on geographical origin: a company counts because it is based in an emerging market – regardless of its size, valuation or quality.

Whether emerging markets count as a separate factor has not been conclusively settled by research – they do not appear in the well-known factor models of Fama and French. However, Gerd Kommer, author of the standard work “Souverän investieren mit ETFs”, treats the higher political risk of these markets as a separate risk premium – and we share this view.

The largest position in the MSCI Emerging Markets as of 27 February 2026 is the Asian chip giant Taiwan Semiconductor – a global corporation that MSCI classifies as an emerging markets stock solely because of its domicile. Rival index provider FTSE, on the other hand, already classifies Taiwan as a developed market.

Is the Political Risk factor worth it?

The Political Risk factor delivers in the long run: since the MSCI Emerging Markets Index was launched in December 1987, it has outperformed the global MSCI ACWI by 1.62 percentage points a year. So the premium exists – but it requires an exceptional amount of patience.

That’s because emerging markets tend to go through long and painful dry spells. The 15-year chart clearly shows that emerging market stocks lagged behind developed markets almost continuously from 2011 to the end of 2024 – more than a decade of underperformance. Anyone who lost their nerve and sold out during this phase missed the subsequent recovery. The annualised 5-year return of 6.79% compared with 12.23% for the MSCI ACWI underlines how persistent such phases can be.

If you aim for a global portfolio weighted by market capitalisation, you should have around 10% invested in emerging markets anyway – that is simply the weighting that matches the global stock market. If you also believe in the factor premium, you can deliberately overweight this share – but you should factor in the long dry spells and bring a correspondingly long investment horizon.

 How to invest in the Political Risk factor

The range of emerging markets ETFs is pleasingly large and varied. You will find suitable products for Swiss investors in our big review Best ETFs in Switzerland and worldwide: And the winner is…

How do the five factors perform?

The only, but significant, advantage of factor investing is the excess return. This also applies – viewed over the (very) long term and to varying degrees – to the five factors described above. The table below shows the excess return per factor and over different periods.

Period	Number of Years	Size Premium	Value Premium	Momentum Premium	Quality Premium	Political Risk Premium
1975–2020	46	3,3%	0,4%	–	–	–
1975–1994	20	5,4%	2,1%	–	–	–
1995–2020	26	1,7%	-0,5%	4,3%	3,4%	0,6%
1975–1990	16	7,1%	2,1%	–	–	–
1991–2000	10	-3,1%	0,5%	–	–	2,3%
2001–2010	10	6,4%	1,4%	1,8%	-0,2%	15,4%
2011–2020	10	0,5%	-1,5%	4,0%	3,4%	-6,1%

Scientifically confirmed excess returns for five factors; all data before taxes and costs. (Source: Gerd Kommer, «Factor Investing – die Basics», updated November 2021)

A few interesting points stand out:

• Size and Value have so far been studied most thoroughly and over the longest periods – the data series go back to 1975. This is also confirmed by the MSCI data, which is available for Value back to December 1974.
• The fluctuations are sometimes considerable. For example, political risk stocks underperformed by 6.1% between 2011 and 2020, after outperforming by 15.4% a year in the decade before. Our MSCI data confirms this picture: since December 1987, the long-term premium has still amounted to 1.62 percentage points a year – bought with extreme patience.
• At 4.3% over 26 years (1995–2020), the momentum premium remains the most attractive in this comparison. Our MSCI data confirms this too: since June 1994, the MSCI World Momentum has outperformed the overall market by 2.79 percentage points a year. At the other end of the spectrum, the Value factor even slipped into negative territory in the updated table (–0.5% over 26 years) – a finding reflected in our MSCI data: since 1974, the premium has amounted to a meagre 0.38 percentage points a year.
• Quality impresses with a stable 3.4% over 26 years – a finding impressively confirmed by our MSCI data: since June 1994, the MSCI World Quality has beaten the overall market by a strong 3.15 percentage points a year.

What are the disadvantages of factor investing?

But before you opt for factor investing, you should also know about its main drawbacks.

All five factors analysed share the following drawbacks:

• Higher costs (TER), even though prices have fallen sharply in recent years and most factor ETFs have now settled at 0.25–0.35% p.a.
• Small product range – especially for the Momentum factor, the choice of ETFs is still limited
• Longer dry spells in returns than with a market-cap-weighted investment require a greater tolerance for pain and more staying power – as the Kommer table clearly shows, individual factors can be negative for an entire decade

The Value factor also has the following additional drawbacks:

• No significant excess return in the last three decades – our MSCI data confirms this: since 1974, the long-term premium has been a meagre 0.38 percentage points a year – effectively zero after costs
• Above-average tax burden for Swiss investors, as the distributed share of total performance is higher for value stocks than for the overall market and the other four factors (see article Dividend strategy doesn’t pay off!).

Where can you buy factor ETFs?

The factor ETFs presented are available from most established online brokers. You are in particularly good hands with the following four, which we have tested in detail and recommend:

Saxo | Swissquote | DEGIRO | Interactive Brokers

Note: Saxo is particularly attractive for iShares ETFs: its ETF savings plans let you buy selected iShares products without purchase fees – including, for example, the iShares Edge MSCI World Quality Factor ETF. A clear advantage for anyone who wants to invest in factor premiums automatically and cost-efficiently.

– Partner offer –

– – – – –

On our compact recommendations page, you will find the key information on our preferred online brokers, including sign-up bonuses.

Conclusion

We sum up our conclusions in the following five points:

1. Factor investing can lead to an excess return in the long run and is generally worth considering – but it is not a must. If you decide to go for it, you should only use factor ETFs as an addition to your core portfolio, not as a complete replacement for a broad market ETF. A simpler and cheaper alternative remains an investment in the overall market anyway.
2. Momentum and Quality stand out as by far the most attractive factors: since 1994, both have outperformed the overall market by around 3 percentage points a year. Political Risk and Small Size are also positive, but their premiums are more modest. The Value factor disappoints: after more than 50 years of research, the long-term premium after costs and taxes is effectively zero – so you can hardly speak of a noticeable premium any more.
3. The range of factor ETFs has improved in recent years and costs have fallen. Even so, factor ETFs are still more expensive than market-cap-weighted ETFs – something you should take into account when deciding.
4. The excess returns of the five factors examined have been scientifically confirmed over long periods. But there is no guarantee whatsoever that this will also hold true in the future – most factor premiums have tended to weaken after their scientific discovery.
5. Factor investing requires iron discipline: individual factors can be negative for an entire decade. If you can’t sit through these dry spells, you are better off with a simple global market ETF.

You might also be interested in

Updates

2026-03-26: Minor changes made.

2026-03-18: Text and charts comprehensively updated.

Disclaimer

Disclaimer: Investing involves the risk of loss. You have to decide for yourself whether or not you want to take these risks.

Errors excepted: We have written this article to the best of our knowledge and belief. Our goal is to provide you as a private investor with information on finance that is as objective and meaningful as possible. Should we nevertheless have made mistakes, forgotten important aspects or should information no longer be up to date, we would be grateful for your feedback.