Factor-based index strategies combine the benefits of both active and passive investment styles.
They use well established stock-specific factors used in active investment and rules based frame work of passive investment.
Factor based investing has come a long-way after the first factor-based ETF got introduced way back in 2003. There are 1,200+ factor-based equity ETFs/ETPs listed globally with total assets under management of US$534 billion offered by around 150 asset managers.
There are single-factor indices and multi-factor indices. The most popular factors which are typically used to capture long term risk premium across the globe include Alpha, Quality, Value, Low-Volatility amongst others.
Single-factor based index strategies, however, typically exhibit cyclicality and may underperform during certain market phases.
An alternative smart beta index strategy is to select stocks based on combination of multiple factors, targeting to counter the impact of cyclicality of single-factor indices.
The 4 multi-factor indices are:
1. NIFTY Alpha Low-Volatility 30.
2. NIFTY Quality Low-Volatility 30.
3. NIFTY Alpha Quality Low-Volatility 30.
4. NIFTY Alpha Quality Value Low-Volatility 30.
Each of the above 4 indices track a portfolio of stocks selected based on combination of 2 or more factors. The factor details along with weights are presented in the table below.
Multi-Factor index strategies tend to counter the cyclical behavior of single-factor index strategies by diversifying across factors.
Historically, long term investors and fund managers have relied upon passive investment styles like market capitalization and single factor based portfolio design techniques to capture the premium for systematic risk.
Source: NSEIndia
Multi-factor based indexing strategies present an effective route through which investors can gain exposure to combination of factors which were earlier accessible only through stock picking in active investment.
They use well established stock-specific factors used in active investment and rules based frame work of passive investment.
Factor based investing has come a long-way after the first factor-based ETF got introduced way back in 2003. There are 1,200+ factor-based equity ETFs/ETPs listed globally with total assets under management of US$534 billion offered by around 150 asset managers.
There are single-factor indices and multi-factor indices. The most popular factors which are typically used to capture long term risk premium across the globe include Alpha, Quality, Value, Low-Volatility amongst others.
Single-factor based index strategies, however, typically exhibit cyclicality and may underperform during certain market phases.
An alternative smart beta index strategy is to select stocks based on combination of multiple factors, targeting to counter the impact of cyclicality of single-factor indices.
The 4 multi-factor indices are:
1. NIFTY Alpha Low-Volatility 30.
2. NIFTY Quality Low-Volatility 30.
3. NIFTY Alpha Quality Low-Volatility 30.
4. NIFTY Alpha Quality Value Low-Volatility 30.
Each of the above 4 indices track a portfolio of stocks selected based on combination of 2 or more factors. The factor details along with weights are presented in the table below.
Multi-Factor index strategies tend to counter the cyclical behavior of single-factor index strategies by diversifying across factors.
Historically, long term investors and fund managers have relied upon passive investment styles like market capitalization and single factor based portfolio design techniques to capture the premium for systematic risk.
Multi-factor based indexing strategies present an effective route through which investors can gain exposure to combination of factors which were earlier accessible only through stock picking in active investment.