As investors shift away from actively managed funds towards passive investments, factor investing or smart-beta investing has rapidly gained popularity as passive investors try to replicate the performance of various active strategies at a low cost.

For example, investors seeking to gain exposure to value, which has historically outperformed the market, can buy a value focused smart-beta ETF, rather than a higher cost actively managed value fund, which tend to underperform their benchmarks in general.

However, while there is plenty of evidence that shows some factors do outperform, the explosion in demand for these products has led to rapid growth in the number of factors and smart-beat funds investors can follow. Many of these factors put forward as having generated premiums in the past are merely the result of data mining, and there’s no guarantee that these performance figures will ever be realized in the real world.

To investigate this trend, Credit Suisse analysts Elroy Dimson, Paul Marsh and Mike Staunton set out to analyze the performance of various factor and smart-beta strategies over and ultra long holding period (118) across 23 markets. The findings of this study are presented in the bank’s Investment Returns Yearbook 2018.

At the beginning of 2018 there were more than 7000 ETFs and ETPs with over 12,000 listings and assets of more than $5 trillion, an enormous market for investors to choose from. According to the report from the Financial Times, assets in products that followed factors surpassed $1 trillion during 2017.

The idea of factor-based investing was really first proposed by Fama and French in 1993. These researchers identified four factors in addition to the market including size, value, profitability, and investment.

Subsequent papers identified other factors including low-risk, momentum, income and low volatility. In total, researchers have identified 316 different factors that can lead to different equity returns.