Smart Beta & Factor Indexes
Implementing factor investing
Marlies van Boven, managing director of research and analytics at FTSE Russell meets Francesca Fabrizi, editor in chief at European Pensions, to discuss her recent paper “Implementation Considerations for Factor Investing.” The video interview covers some of the fundamental questions market participants ought to consider before deploying a factor based investment strategy.
Smart Beta: Classification & Sample Range
We believe simplicity is key when looking at Smart Beta indexation.
What is the index objective?
Factor indexes aim to achieve for underlying indexes an efficient & controlled exposure to ‘target factors’ - stock level characteristics that are widely considered as important in explaining a stock’s risk and return.
The FTSE Russell factor indexes use a transparent and rules-based methodology to achieve controlled exposure to the target factor(s) by re-weighting an underlying index towards the target factor(s). Secondary objectives include ease of implementation, efficiency, and flexibility.
What is the index objective?
Alternatively weighted indexes are designed to address perceived concentration risks in capitalization-weighted indexes or to reduce volatility, e.g., FTSE Global Minimum Variance Index Series. Factor indexes are designed to replicate factor return premia using a transparent and rules-based methodology. There is an overlap between these two categories: alternatively weighted indexes have factor exposures. However, these exposures may not be stable over time and are a by-product of the index design, rather than the index’s primary objective.
Non-capitalization weighted indexes employ alternative methods to select and weight stocks. Methodology is designed to weight companies by economic size, severing the link between price and index weight. Index constituents are weighted using a composite of company fundamentals, e.g., total cash dividends, free cash flow, total sales and the book value of equity.
2018 Global Smart beta survey of Asset Owners (1:25)
Now in its fifth year, the FTSE Russell global institutional smart beta survey provides a clear insight into major trends at work in recent years in awareness, popularity and use of smart beta index strategies among global institutional asset owners.
Getting smart with sustainability (10:20)
Pensions Age speaks to FTSE Russell to discuss Smart Sustainability, the new index methodology from FTSE Russell which combines sustainable parameters with risk premia via factor exposure.
Factor indexing and ETFs (5:44)
Romana Raj and Stephane Degroote of FTSE Russell are joined by Matthieu Mouly from Lyxor Asset Management to discuss smart beta and factor indexation and to explore the reasons for the rapid growth in this asset class
Peter Gunthorp, Managing Director, Research & Analytics discusses some of the key features of the FTSE Russell Minimum Variance Index (3:55)
The objective of the index is to reduce overall volatility while maintaining ‘healthy’ diversification. Minimum variance portfolios are not necessarily comprised of low volatility stocks; the volatility reduction stems from the correlations between individual stocks volatilities. Thus a Minimum Variance portfolio could well contain a number of very volatile stocks that offset each other.