Andy Dougan, director research & analytics, Jake Bambridge head of product marketing alt weighted indexes
About this talk
Smart Beta and Factor Tilts are sometimes treated as though they are distinct entities. The consensus is that the factor exposures of Smart Beta indexes drive their performance outcomes, however there continues to be a debate regarding whether there is additional, incremental alpha associated with the mere act of re-balancing or use of non-market capitalisation weighting schemes.
In this webinar we demonstrate that the performance of the “big three” smart beta indexes, Equal Weight, Fundamental Weighting and Minimum Variance are driven solely by their factor exposures.
We do this by replicating their factor exposures by applying a set of factor tilts to a set of Market Capitalization weights. We find that replication of factor exposures replicates performance outcomes. Therefore we demonstrate that these Smart Beta portfolios are indeed types of factor indexes with multiple and variable factor exposures.
Stripped of incremental alpha, what remains as potentially “smart” about Smart Beta is the size and nature of the factor bets taken. After all, we still have to build a Smart Beta portfolio to determine just what factor exposures to replicate with a “dumb” factor index. Or do we?
We demonstrate that the time varying magnitude of factor exposures of Equal Weighted and Fundamental indexes are given by simple measures of cross-sectional dispersion of factor values. A minimum variance portfolio is more complex, but when approximated by an (inverse) risk weighted portfolio an equivalent dispersion measure may be derived for the level of factor exposure.
In conclusion we demonstrate these Smart Beta indexes are a subset of factor indexes whose factor exposures are simply determined by the cross-sectional dispersion of factor values.
FTSE Russell is a leading global provider of benchmarking, analytics and data solutions for investors, giving them a precise view of the market relevant to their investment process. A comprehensive range of reliable and accurate indexes provides investors worldwide with the tools they require to measure and benchmark markets across asset classes, styles or strategies.…