When you’re retired—or close to it—you want your money to work harder, smarter, and safer. But with so many investment strategies out there, how do you find one that truly delivers? That’s where factor investing comes in.
Factor investing is a powerful, research-backed way to invest in stocks that have certain characteristics—called “factors”—that are proven to drive better returns or reduce risk. It’s like having a recipe for cooking up a smarter portfolio.
Let’s break it down in plain English, explore the main factors retirees should know, and show how factor investing can help you sleep better at night while potentially boosting your retirement income and long-term growth.
What Is Factor Investing?
Factor investing is a strategy that focuses on choosing stocks based on specific traits that have historically led to higher returns or lower risk. Instead of picking individual companies or investing in the whole market (like with an S&P 500 index fund), factor investing targets groups of stocks with similar characteristics—like high profitability, steady momentum, or low price volatility.
Think of it as filtering the stock market through a set of smart rules.
There are two types of factors:
- Style Factors (used in equities): such as value, size, quality, momentum, low volatility, and dividend yield
- Macro Factors: such as interest rates, inflation sensitivity, and economic growth
For retirees, the style factors are most relevant because they help manage risk, generate income, and potentially increase returns.
Why Should Retirees Care?
Retirees have a unique set of needs:
- Preserve capital
- Generate income
- Beat inflation
- Avoid big losses
Factor investing aligns perfectly with these goals. According to research from BlackRock, Morningstar, and others, factor-based strategies have historically outperformed the broader market by 1–2% annually over long time periods—without taking on significantly more risk.
That may not sound like much, but over a 20-year retirement, that extra 1–2% can mean tens or even hundreds of thousands of dollars in additional wealth.
The Top 5 Factors for Retirees
Let’s explore the five factors most relevant to retirees—and show you two solid ETFs for each one.
1. Low Volatility
Goal: Reduce risk without giving up too much return.
Low volatility stocks tend to fall less during market downturns. For retirees, that’s critical. In fact, research from MSCI and S&P Dow Jones shows that low-volatility strategies often match or beat the market long-term—with fewer gut-wrenching drops.
📈 Historical Edge: From 1991–2023, low-volatility portfolios returned about 10.1% annually vs. 9.5% for the S&P 500, with far less volatility.
Top Low-Volatility ETFs:
- SPLV – Invesco S&P 500 Low Volatility ETF
Holds the 100 least volatile stocks in the S&P 500. Simple and effective. - USMV – iShares MSCI USA Min Vol Factor ETF
Uses a smarter weighting system to minimize risk while maintaining broad exposure.
Why Retirees Should Consider It:
Helps smooth out your portfolio’s ride, especially important when you’re withdrawing income.
2. Quality
Goal: Invest in financially strong companies.
Quality stocks have high profit margins, low debt, and steady earnings. These companies weather economic storms better than their peers.
📈 Historical Edge: Quality stocks have outperformed by 1.3% per year with lower drawdowns during recessions (Source: MSCI).
Top Quality ETFs:
- QUAL – iShares MSCI USA Quality Factor ETF
Focuses on companies with strong balance sheets and high returns on equity. - SPHQ – Invesco S&P 500 Quality ETF
Screens the S&P 500 for companies with high-quality earnings and stable performance.
Why Retirees Should Consider It:
You’re investing in the best-run companies—less drama, more reliability.
3. Value
Goal: Buy solid companies at bargain prices.
Value investing is a classic. It focuses on undervalued stocks—those with low price-to-earnings, price-to-book, or price-to-sales ratios.
📈 Historical Edge: Over the last 50 years, value stocks have outperformed growth stocks by about 1.4% annually(Source: Fama-French data).
Top Value ETFs:
- VTV – Vanguard Value ETF
Diversified exposure to large-cap value stocks, low fees. - IUSV – iShares Core S&P U.S. Value ETF
Another solid, broad-based option focused on S&P 900 value stocks.
Why Retirees Should Consider It:
You get more dividend income and less hype. Value stocks tend to pay more and swing less.
4. Momentum
Goal: Invest in stocks that are already doing well.
Momentum strategies buy stocks that have been rising in price. It may seem counterintuitive, but the data shows it works—because winning stocks often keep winning.
📈 Historical Edge: Momentum has delivered an annualized premium of about 1.5% over the market (Source: AQR Capital Management).
Top Momentum ETFs:
- MTUM – iShares MSCI USA Momentum Factor ETF
Uses a rules-based approach to own top-performing large and mid-cap stocks. - QMOM – Alpha Architect U.S. Quantitative Momentum ETF
A more aggressive, concentrated approach—best used in moderation for retirees.
Why Retirees Should Consider It:
Momentum can help you stay in the market’s strongest areas without guesswork.
5. Size (Small Caps)
Goal: Capture higher returns by owning smaller companies.
Small-cap stocks historically outperform large-cap stocks over the long run because of their growth potential—though with more risk.
📈 Historical Edge: Since 1926, small-cap stocks have beaten large-caps by about 2% annually, though not every year.
Top Small-Cap Factor ETFs:
- IWM – iShares Russell 2000 ETF
The most popular small-cap ETF. Broad and liquid. - AVUV – Avantis U.S. Small Cap Value ETF
Combines size and value factors. Highly praised for tax efficiency and smart design.
Why Retirees Should Consider It:
A small allocation to small caps (especially small-cap value) can add extra return over time.
Bonus Factor: Dividend Yield
Goal: Generate income from companies that reward shareholders.
Dividend investing is a natural fit for retirees. High-dividend stocks offer steady cash flow and can help replace traditional bonds in a low-interest world.
📈 Historical Edge: Dividend-paying stocks have outperformed non-dividend stocks over time, with lower volatility(Source: Ned Davis Research).
Top Dividend ETFs:
- SCHD – Schwab U.S. Dividend Equity ETF
A retiree favorite. High quality, high yield, and low fees. - VIG – Vanguard Dividend Appreciation ETF
Focuses on companies with a history of growing dividends—a good inflation hedge.
Why Retirees Should Consider It:
Income you can count on, without selling shares.
How to Build a Retirement-Friendly Factor Portfolio
You don’t need to bet everything on a single factor. Instead, you can blend multiple factor ETFs into a diversified, balanced portfolio.
Here’s a simple model:
- 30% Low Volatility (e.g., USMV or SPLV)
- 20% Quality (e.g., QUAL)
- 20% Value (e.g., VTV or AVUV)
- 10% Momentum (e.g., MTUM)
- 10% Dividend (e.g., SCHD)
- 10% Bonds or Cash (for short-term needs)
This approach gives you exposure to multiple proven factors while staying diversified and resilient.
Real-Life Example: Meet Barbara, the Factor-Focused Retiree
Barbara, age 68, wanted more income and less stress. She’d been in a basic S&P 500 index fund, but the rollercoaster ride in 2022 rattled her nerves.
She shifted part of her portfolio to a mix of USMV (low-volatility), SCHD (dividends), and QUAL (quality). The result?
- Smoother ride during market dips
- Better income from SCHD
- Peace of mind knowing she owned strong, stable companies
She didn’t have to beat the market—she just needed her investments to support her retirement goals.
Final Thoughts: Factor Investing = Smarter Retirement Investing
Factor investing isn’t about chasing the latest trend. It’s about using data-backed strategies that have worked for decades.
For retirees, that means:
✅ Lower risk
✅ Steadier income
✅ Potentially higher returns
With ETFs, it’s never been easier—or more affordable—to build a retirement portfolio using factor investing.
So whether you’re looking to boost income, minimize volatility, or protect your savings, factor investing can be your secret weapon for a more confident retirement.
Want to Learn More?
This article is adapted from Your Boring Portfolio: Get Off the Stock Market Rollercoaster and Sleep Well at Night with Low-Volatility Stocks, available now on Amazon in Kindle or paperback formats.