Tag Archives: factor indices
Factors and Factor Indices
There is a subtle but important distinction between factors and factor indices. “Factor” denotes an attribute with which long-term excess returns are thought to be associated. Fama and French, for instance, famously found that small size and cheap valuation were factors in this sense. A number of other variables – prominently including momentum, low volatility,…
- Categories Equities, Factors, S&P 500 & DJIA, Strategy
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A Way of Seeing
A wise man told me years ago that sometimes the things we see are less important than our way of seeing. As more formerly-active investors begin to use passive vehicles, it’s useful to consider if there’s a distinctly index-centric way of seeing, and what its elements might be. I think that there are at least…
- Categories Equities, Factors, S&P 500 & DJIA
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Factor Investing 101
For many years, active fund managers and institutional investors have often used a factor-based approach either to strategically construct portfolios or to tilt their portfolios toward well-known risk factors, such as low volatility, value, momentum, dividend, size, and quality, to capture the factor risk premium. Investors seeking to identify skilled active managers look to dissect…
Multiple Paths to Multiple Factor Indexing
Single factor “smart beta” indicized strategies that were once exclusive to the realm of active management. Multifactor indexing is beginning to garner much interest as the newest chapter of index innovation. It’s a natural conjecture that if single factors are successful, combining more than one factor should prove even more beneficial. While any combination of…
2016 Market Performance through the Lens of Smart Beta
Participants in the Indian equity market in 2016 may have been disappointed with the muted performance by broad equity market indices (the S&P BSE SENSEX was up 3.47% for the year), while other asset classes such as bonds showed strong performance (the S&P BSE Bond Index was up 13.2%). Where could market participants have found…
Visualizing Factor Exposures
Measuring the away-from-benchmark exposures of active portfolios (or “smart beta” indices) is not inherently complicated. To what degree, for example, is a portfolio cheaper than its benchmark, or more tilted toward high quality stocks? Practitioners typically approach the question in one of several ways: Calculating weighted average differences – e.g., the yield on my portfolio is…
- Categories Factors, S&P 500 & DJIA, Strategy
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The Making of a Passivist
I have few memories of my school French, but one of the fondest is of Moliere’s Monsieur Jourdain, who was delighted to learn in middle age that he had been speaking prose for the last 40 years. Similarly, I did not realize until recently that I was a “passivist,” as the Wall Street Journal has now anointed the…
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When Smart Beta Fails
How should an investor in a factor (or “smart beta”) index judge its performance? In this respect at least, smart beta is like any other strategy: you should evaluate it against the claims that its vendors made before you bought it. This requires some subtlety. Smart beta methodologies pick stocks based on fundamental or technical…
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Indicizing Income
This morning’s Wall Street Journal described one aspect of the “Brave New World” occasioned by ultra-low (or negative) interest rates: Tellingly, strategists at Citigroup have created a basket of stocks for what they call “bond refugees”—investors who want yield but without the big swings in prices associated with equities. To do so, they looked for stocks…
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- Equities, Factors, S&P 500 & DJIA, Strategy
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The Teleology of Smart Beta
As assets tracking factor indices grow, so does the attention paid to evaluating and promoting these so-called “smart beta” funds. Even the nomenclature attracts attention. Professor William Sharpe, famous among other things for introducing the concept of beta to academic finance, has said that the term “smart beta” makes him “definitionally sick,” and lesser lights than…
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