Wait, Tesla is a value stock? Welcome to the wacky world of factor ETFs

Subscribe to enjoy similar stories. When you crack open several funds that sound the same, you can find very different investments inside. That’s one of the most subtle, but important, lessons of 2025.

As exchange-traded funds have become the default choice for millions of investors, it’s vital to understand that you can’t know what you’re going to get unless you take the time to look inside first. To see what I mean, consider factor ETFs, also called smart-beta funds. What’s a “factor"? It’s a set of characteristics, shared by large numbers of companies, that shape risk and return—for example, value or momentum.

Academic research has shown that many factors have outperformed the overall market over the long run. In the short run, results at funds pursuing a similar strategy can vary wildly. Last year, iShares MSCI USA Momentum Factor, which targets stocks with high recent returns, gained 22.1%.

Alpha Architect US Quantitative Momentum ETF, which also favors stocks with hot performance, was up only 2.6%. Returns were also widely dispersed at funds based on other factors, such as value (statistically inexpensive stocks), quality (companies with high profitability and low debt), and minimum volatility (stocks whose prices fluctuate less than the overall market). Among funds with similar names and objectives, return differences of 10 percentage points or more were common in 2025.

In fact, funds that invest in the same factor have rarely performed in lockstep, says Nicolas Rabener, founder of Finominal, an investment-research firm in London. Wide gaps among look-alike funds are the rule, not the exception. That’s because different ETF managers define the same factor in drastically divergent ways.