Factor investing has moved from the fringes to the mainstream of Australian wealth management. In 2025, more investors than ever are rethinking their portfolios to harness the power of factors—those persistent drivers of risk and return that can make a real difference to your bottom line.
What Is Factor Investing and Why Does It Matter?
Factor investing is an investment approach that targets specific characteristics—known as factors—that have historically delivered above-average returns or reduced risk across market cycles. The most popular factors include value, momentum, quality, low volatility, and size. Unlike traditional investing, which often relies on broad market exposure or stock-picking, factor investing uses rules-based strategies to tilt portfolios towards these attributes.
Why does this matter in 2025? Recent market turbulence, persistent inflation, and changing interest rates have highlighted the need for smarter portfolio construction. Factor investing offers a systematic way to pursue higher returns and manage risk, appealing to everyone from superannuation funds to everyday retail investors.
The Key Factors Driving Australian Portfolios in 2025
In Australia, the appetite for factor-based strategies has grown sharply, spurred by both academic research and local market dynamics. Here are the core factors that are shaping portfolios this year:
- Value: Buying stocks that appear undervalued relative to fundamentals. This factor has rebounded in popularity as investors seek bargains amid rising interest rates and tighter credit conditions.
- Momentum: Backing shares that have performed strongly in the recent past. In 2025, momentum has delivered robust returns in sectors like technology and green energy.
- Quality: Focusing on companies with solid balance sheets, stable earnings, and strong governance. With economic uncertainty lingering, the quality factor is a defensive favourite among Australian investors.
- Low Volatility: Seeking out stocks with less price fluctuation. This has become especially relevant as global markets react to shifting monetary policies from the RBA and other central banks.
- Size: Investing in smaller companies, which can offer higher growth potential but also more risk. Recent ASX performance has seen renewed interest in small- and mid-cap stocks.
2025 Policy Updates and Product Innovations
The Australian financial landscape is evolving to support factor investing. In early 2025, ASIC released new guidance on transparent factor disclosures for managed funds and ETFs, making it easier for investors to understand what they’re buying. Meanwhile, the ASX has seen a surge in smart beta ETFs—funds that track indices built around factors rather than traditional market-cap weighting.
Recent regulatory shifts include:
- Mandatory factor transparency for all new ASX-listed ETFs, effective from March 2025
- Tax clarity for factor-based funds, following ATO updates on capital gains treatment for systematic strategies
- Super fund adoption: Major superannuation providers like AustralianSuper and REST have introduced factor-tilted options, giving members access to institutional-grade strategies
One practical example: an Australian investor in 2025 can now allocate to an ASX-listed ETF that targets the value and quality factors, with real-time reporting on exposures, costs, and performance. This transparency and choice were almost unthinkable just a few years ago.
Building a Factor-Based Portfolio: Steps for 2025
Factor investing isn’t a one-size-fits-all solution, but it offers powerful tools for both growth and risk management. Here’s how Australians are approaching factor strategies this year:
- Define your objectives: Are you seeking higher returns, lower volatility, or both? Each factor behaves differently across market cycles.
- Choose your factors: Blend factors for diversification. For example, combining value and momentum can smooth returns over time.
- Select your products: Compare ETFs and managed funds for cost, transparency, and fit with your goals. Look for funds with clear factor methodologies and low tracking error.
- Monitor and rebalance: Factor exposures drift as markets move. The new wave of Australian factor ETFs often includes auto-rebalancing features, but it’s wise to check your allocations regularly.
With more tools and data available than ever before, Australians can now build sophisticated portfolios that would have been the envy of institutional investors just a decade ago.
The Future: What’s Next for Factor Investing Down Under?
As technology and regulation continue to evolve, expect factor investing to become an even bigger part of the Australian financial landscape. In 2025, we’re seeing a push towards customisable factor solutions—think ETFs that let you dial up or down exposure to different factors with a few clicks. And with ongoing policy support, transparency and investor protection will remain front and centre.
For Australians seeking smarter, more resilient portfolios, factor investing offers a blend of science and flexibility that’s hard to beat.
