Factor Investing on Country Level

Away with Stocks?

August 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Investors can harvest returns from common equity factors on country level
  • Returns are consistent when combined into a multi-factor portfolio
  • Performance of some factors is comparable to those on single stock level, indicating common drivers


Factor investing strategies like Value are relatively easy to explain, but complex in implementation. Creating long-short factor portfolios requires investors to define the universe of stocks, portfolio size, weighting methodology, metrics for ranking the stocks, and the rebalancing frequency. The stocks in the short portfolio need to be available for borrowing, which requires the availability from a stock lending desk.

Theoretically, the portfolio needs little maintenance once it is live, but corporate actions like mergers or spin-offs frequently require attention and changes from portfolio managers. Managing a diversified factor portfolio of single stocks is like caring for a child, work never stops.

Investors can contemplate leaving the somewhat messy world of stocks behind and migrate to country level, where futures and ETFs might lighten some of the burdens of portfolio management. However, it is questionable if common equity factors generate abnormal returns on country level.

In this short research note, we will analyze common equity factors on country level as well as evaluate combining these in a multi-factor portfolio (try Finominal’s Portfolio Diagnostics for portfolio analysis).


We focus on four common equity factors namely Value, Momentum, Low Volatility, and Quality, in a universe of 25 developed stock markets. The factor definitions are in line with academic and industry standards. Fundamental data is aggregated from company to country level for all stocks with a market capitalization of above $1 billion. Long-short portfolios are created by selecting the top and bottom 30% of countries ranked by the factor definition. Portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points.


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