How to Use Factor ETFs to Outperform the Market as a European Investor in 2026

Factor ETFs—sometimes called smart beta ETFs—offer European investors a systematic way to pursue higher returns or lower risk than traditional “market-cap-weighted” ETFs. In this tutorial, you’ll learn what factor ETFs are, how to evaluate them using EUR-based data, and exactly how to buy them on platforms like Trade Republic, DEGIRO, and Interactive Brokers. As we covered in our Complete Beginner’s Guide to European ETFs, index investing is powerful, but factor strategies can add an extra edge—if you use them wisely.

Step 1: Understand What Factor ETFs Are

What to do: Learn the difference between traditional ETFs and factor (smart beta) ETFs, and get familiar with the main “factors” targeted by these funds.

Why it matters: Factor ETFs are not just regular index funds. They systematically tilt towards stocks with specific characteristics—like value, momentum, quality, or size—that have historically delivered outperformance (or “alpha”) over the broad market. Understanding these is crucial before investing.

• Value: Focus on undervalued stocks (low price-to-earnings, price-to-book, etc.)
• Momentum: Target stocks with strong recent price performance.
• Quality: Select companies with robust balance sheets and stable earnings.
• Size: Tilt toward smaller companies (small caps) within an index.

Major European providers include:

• iShares Edge (by BlackRock): e.g., iShares Edge MSCI Europe Value Factor UCITS ETF (IE00BQN1K901)
• Xtrackers (by DWS): e.g., Xtrackers MSCI Europe Momentum Factor UCITS ETF (IE00BL25JP72)
• Lyxor and Amundi also offer smart beta products

What can go wrong: If you confuse factor ETFs with sector or thematic ETFs, you could end up with unintended exposures. (See our thematic ETF guide for the distinction.)

Step 2: Evaluate Factor ETF Track Records — in EUR

What to do: Examine the performance history of factor ETFs, focusing on EUR-based results and risk metrics.

Why it matters: Many factor studies are based on US data and USD returns. As a European investor, your real experience depends on EUR-denominated funds and local market conditions.

1. Go to your broker (e.g., DEGIRO or Interactive Brokers) and search for the ETF’s ISIN (e.g., IE00BQN1K901 for iShares Edge MSCI Europe Value Factor UCITS ETF).
2. Download the factsheet and Key Information Document (KID).
3. Check the fund’s performance chart. Make sure it’s denominated in EUR—not just USD.
4. Compare the factor ETF’s 3-year and 5-year annualized returns against a market-cap-weighted benchmark, such as the iShares Core MSCI Europe UCITS ETF (IE00B1YZSC51).

Example: Suppose the iShares Edge MSCI Europe Value Factor UCITS ETF (EUR Acc) returned 8.2% annualized over 5 years, while the iShares Core MSCI Europe UCITS ETF returned 7.5% over the same period. This suggests a value tilt paid off—but check volatility and drawdowns too.

What can go wrong: If you compare EUR and USD returns, you may get a distorted view due to currency effects. Also, past outperformance is not guaranteed to persist.

Step 3: Choose the Right Factor(s) for Your Portfolio

What to do: Decide which factor(s) you want to tilt towards, based on your goals, risk tolerance, and market outlook.

Why it matters: Different factors perform better in different environments. For example, value often outperforms after market corrections, while momentum can shine during strong bull markets. Combining factors may smooth out performance.

• If you want to target undervalued stocks, consider a value ETF (e.g., iShares Edge MSCI Europe Value Factor UCITS ETF).
• If you believe recent winners will keep winning, look at momentum ETFs (e.g., Xtrackers MSCI Europe Momentum Factor UCITS ETF).
• If you seek stability, explore quality ETFs (e.g., iShares Edge MSCI Europe Quality Factor UCITS ETF, ISIN: IE00BQN1KG01).
• For higher (but more volatile) growth, size/small-cap ETFs (e.g., iShares MSCI Europe Small Cap UCITS ETF, IE00B3VWMM18) can be an option.

What can go wrong: Chasing past winners or over-concentrating in one factor can backfire if market conditions change. Always diversify and reassess regularly.

Step 4: Buy Factor ETFs on a European Platform

What to do: Execute your first factor ETF purchase using a European broker. Below are step-by-step examples for Trade Republic, DEGIRO, and Interactive Brokers.

Why it matters: Each platform has unique steps, minimums, and fee structures. Using the right process ensures you minimize costs and avoid errors.

Example A: Buying on Trade Republic

1. Open the Trade Republic app and log in.
2. Tap Search and enter the ETF’s ISIN (e.g., IE00BQN1K901).
3. Tap the ETF, then tap Buy.
4. Enter the amount in EUR (e.g., €1,000).
5. Review the order summary and tap Buy to confirm.

You should now see your first ETF purchase confirmed with a value of approximately €1,000 in your portfolio.

Example B: Buying on DEGIRO

1. Log in to your DEGIRO account.
2. Type the ETF’s ISIN in the search bar (e.g., IE00BQN1K901).
3. Click the ETF, then click Buy.
4. Enter the number of shares or the total EUR amount you wish to invest.
5. Review fees and confirm your order.

Your order will be executed during market hours. Check your portfolio to verify the purchase.

Example C: Buying on Interactive Brokers

1. Log in to Interactive Brokers via the Client Portal or app.
2. Search for the ETF by ISIN or name.
3. Click Buy, enter your order details (shares or EUR amount), and submit.
4. Monitor the Activity tab for order confirmation.

Within minutes, your factor ETF should appear in your positions list.

What can go wrong: Double-check you’re buying the correct EUR-denominated, UCITS-compliant ETF. Accidentally purchasing a USD version or a non-UCITS fund can have tax/regulatory implications.

Step 5: Integrate Factor ETFs into Your Portfolio

What to do: Decide how much of your portfolio to allocate to factor ETFs versus traditional broad-market ETFs.

Why it matters: Factor ETFs can enhance returns but also increase volatility. Most investors use them as a “tilt” (e.g., 10–30% of equities) rather than replacing their entire core allocation.

Example allocation: Suppose you have a €50,000 portfolio with €40,000 in the iShares Core MSCI World UCITS ETF (IE00B4L5Y983). You decide to allocate 20% (€10,000) to factor ETFs:

• €5,000 in iShares Edge MSCI Europe Value Factor UCITS ETF
• €5,000 in Xtrackers MSCI Europe Momentum Factor UCITS ETF

This approach gives you broad diversification plus targeted factor exposure. Rebalance annually to maintain your desired weights.

Common Mistakes

• Chasing past performance: Factors go in and out of favour. Don’t invest just because a factor recently outperformed.
• Ignoring costs: Some factor ETFs have higher TERs (total expense ratios) than plain-vanilla index funds. Always check fees.
• Overconcentration: Allocating too much to one factor or region increases risk.
• Currency mismatch: Buying a non-EUR denominated ETF exposes you to FX risk.
• Buying non-UCITS funds: Stick to UCITS-compliant ETFs for regulatory protection and tax efficiency in Europe.

Next Steps

• Explore different factor combinations and see how they would have performed in past EUR-based markets.
• Compare DEGIRO vs. Interactive Brokers to find the best fit for your ETF investing style.
• Read our guide on picking the best European index funds for a solid portfolio core.
• Set up a recurring investment plan to automate your factor exposure over time.

Disclaimer: This article is for educational purposes only and does not constitute financial advice. Always do your own research and consider consulting a qualified financial advisor before making investment decisions.