Factor based passive model

“Stapleton then begins a description of factor-based strategies. These include common equity factors, such as value, size, and quality, and they can be used either in place of or to complement market-cap-weighted indexing. She points out that relative to market-cap weighting, factor-based strategies tend to diversify risk exposures; are transparent in terms of factor selection, weighting, and rebalancing; but can be copied by other investors, which can reduce the advantages of a strategy.”

Stapleton’s comment is incorrect regarding risk exposure. Relative to broad-market-cap-weighting, passive factor-based strategies tend to concentrate risk exposures, leaving investors exposed during periods when a chosen risk factor is out of favor.

If a factor based model has multiple factors (size,value,momentum), won’t that provide diversification as opposed to broad market cap weighted?

Factor-based models can diversify risk compared to a single-factor or market-cap-weighted approach, but they also concentrate risk in specific factors like size, value, or momentum. During periods when these factors underperform, the strategy can lag broader indices. The effectiveness of diversification depends on how correlated these factors are and their performance in different market conditions.