Factoring in volatility: building a defensive factor portfolio

Nervy investors are eyeing top-heavy market-cap indices with suspicion. But how can they use factors to navigate the trade-off between diversification and concentration risk?

Imagine a world where countries were physically as big as their economies. A handful of countries would occupy most of the space. The US would take up nearly 60% of the Earth’s surface area! By contrast, some of the biggest geographical countries would shrink dramatically.

A quick glance at a global map, redrawn to reflect the size of financial markets, would see both Australia and New Zealand reduced to a size smaller than Switzerland.