Sector versus Factor Exposure Analysis

Why do investors prefer factors over sectors?

June 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Investors tend to talk more about sector than factor performance
  • However, few investors conduct a regression-based sector exposure analysis
  • The high correlations of sectors, even if structured market-neutral, makes this less meaningful


Switch on CNBC or Bloomberg TV during US stock trading hours and there is a good probability of listening to a lively discussion on current sector performance, eg staples are down, tech stocks are up for the day. The price action is typically explained by economic or company-specific news such as “Microsoft reported quarterly EPS above estimates, dragging the sector along”.

There also tends to be talk about factors, but much less than on sectors. And it is almost exclusively about growth versus value stocks. Rarely do moderators and guests talk about the investment or low volatility factors, perhaps due to these being too abstract compared to sectors that most people are familiar with.

However, when doing due diligence on a mutual fund investors prefer a factor over a sector exposure analysis. Why is that?

In this research article, we will contrast regression-based sector versus factor exposure analysis (read The Complexity of Factor Exposure Analysis).


We use 30 ETFs in this analysis that are trading in the US stock market, which includes actively and passively managed strategies. We create three groups that are comprised of the following ETFs:

  1. Smart Beta ETFs: Vanguard Value ETF (VTV), iShares Core S&P Small-Cap ETF (IJR), WisdomTree U.S. Value Fund (WTV), Alpha Architect U.S. Quantitative Value ETF (QVAL), Vanguard Small-Cap Value ETF (VBR), Vanguard Small-Cap Growth ETF (VBK), Franklin Liberty U.S. Low Volatility ETF (FLLV), Vanguard U.S. Minimum Volatility ETF (VFMV), iShares MSCI USA Quality Factor ETF (QUAL), Vanguard U.S. Multifactor ETF (VFMF)
  2. Random ETFs: ARK Innovation ETF (ARKK), Invesco Solar ETF (TAN), ARK Genomic Revolution ETF (ARKG), WisdomTree U.S. ESG Fund (RESP), VanEck Agribusiness ETF (MOO), AI Powered Equity ETF (AIEQ), ETFMG Alternative Harvest ETF (MJ), ProShares Pet Care ETF (PAWZ), Global X Millennial Consum