Many listeners of the show (myself included) are total market index investors, where we just buy ETFs that are meant to represent the entire market as a whole, worldwide (as opposed to stock picking, or trying to speculate what will go up or down and investing based on that).

After you’ve been index investing for a while though, it’s easy to begin to wonder whether you should customize your portfolio a bit further so that it’s more aligned with your particular situation, or so that it holds more of the types of companies that you want in your portfolio.

When you start looking into this, you’ll quickly come across what is known as factor investing, which can be used to tweak your portfolio so that it holds more companies that contain specific attributes that you like.

In this interview, we talk about the benefits of doing this so that you can better decide for yourself whether it’s worth the added complexity in your portfolio.

We also discuss the risks that you need to be aware of if you partake in modifying your investment portfolio in this way, and we cover how you can analyze factor ETFs to find out which (if any) are the right fit for you.

Of course, we also cover some of the different types of factor ETFs out there and what they mean, so that you can better decide about potentially incorporating them into your portfolio.

Questions:

1. A lot of the listeners of the show are total market index investors, where we just buy the market as a whole using the same core ETFs. What is the advantage of now also adding factor ETFs into our portfolio?

2. What are the risks of incorporating factor ETFs into our portfolio vs just sticking with a total market indexing strategy?

3. There are a lot of factor ETFs out there. How do we begin to analyze them as a DIY investors to find out which (if any) are the right fit for us? Are there any educational resources you can recommend?

4. Would you consider factor investing to be “active” investing?

5. When I spoke with your team in the past, it was mentioned that BMO believes that it is most optimum to have both passive and active investments within our portfolio. Interestingly, when I interviewed Vanguard in the past, they also had the same viewpoint (I wonder if that’s a common viewpoint among all the major ETF providers). Can you share why you think our investment portfolio should have an active component as opposed to just being 100% passive through total market index ETFs?

6. When factor ETFs get launched, they don’t have a long history where we can, for example, stress test them by seeing how they performed during the 2008 financial crisis or the tech crash in the 2000s. If we want to see/simulate how that ETF would have performed in adverse market conditions, how would we go about doing that? I suppose we can use this approach for most new ETFs that get launched and that we want to evaluate?

7. How is using factor ETFs different from just using active ETFs or mutual funds?

8. Would it be fair to say that we can start with a broad, total market ETF approach, but then we can use factors to fine tune our portfolio for our specific needs? (i.e. To either increase potential returns at the cost of risk/volatility, or to reduce volatility/risk at the expense of lower expected returns?). Are there things that we should consider other than just looking at returns and volatility?

9. In one of the BMO white papers I read, it was mentioned how one strategy is to go into and out of factors depending on the economic climate. For example, if we’re seeing slowing vs rising growth, or increasing vs decreasing inflation. However, most listeners of the show (myself included), I think prefer the set-it-and-forget-it approach where we don’t have to follow the economy, the different economic markers, or the markets. Instead, we would rather just have the same ETFs to buy every month with a piece of every paycheque, and just hold those ETFs long term until retirement. For those types of investors, should they just do total market index investing or can factors still be a smart tool to use, without having to analyze what economic climate we are in?

10. Can we go through each of the different factor types and explain what they are?

11. Where can we learn more about factor investing, and where can we get some of your free tools, white papers, and other resources?

Resources:

Free ETF Tools and Resources

ETF Market Insights (Free resources, webinars, and Q&A)

Factor Based Investing ETF White Paper

BMO ETF Lookup, News and Resources: BMOetfs.com

ETF Comparison Tool (for both: Non-BMO and BMO ETFs)