Investing · General financial education

Factors in an index

Some indexes do not weight only by market value. They use characteristics, called factors, such as value, dividends or quality. That is a construction method, not a return guarantee.

In more detail

Investor.gov describes such funds as non-traditional index funds. A factor there is a characteristic a custom-built index uses for selection. The same page says these funds will not necessarily beat the market, and that the actual holdings and fees count. A name such as 'enhanced' does not replace the method.

Background

Read next to index funds, shares, costs and risk: several characteristics can sit in one index. Whether that is broader or narrower than a market-value index is in the method, not in the word factor.

An example

An index weights companies by a value characteristic instead of only by market value. The documents have to say which characteristic and which costs apply. Finmon does not say that value 'wins'.

A common misconception

A factor in the name means the fund beats the market.

It is a selection characteristic of a custom-built index. Investor.gov says expressly that beating the market does not necessarily follow.

Source: Investor.gov · Non-traditional index funds. Last reviewed: 2026-11-01. Editorially reviewed on 2026-11-01. Next review 2027-11-01. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.