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Smart Beta & Factor Indexes

Peter Gunthorp, Managing Director, Research & Analytics discusses some of the key features of the FTSE Russell Minimum Variance Index

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.

 

Smart Beta: Classification & Sample Range

We believe simplicity is key when looking at Smart Beta indexation.

Framework

 

Factor Exposure Indexes

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.

Single Factor & Multifactor Indexes

Alternatively Weighted Indexes

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.

Video gallery

Factor Indexing: The best of both worlds (4:52)

In the first in a series of videos exploring factor indexing, Peter Gunthorp and Guillermo Cano from FTSE Russell's Research and Analytics team discuss how factors are identified, how they impact return outcomes and why multi-factor indexing is growing quickly.;

 

Factor Indexing: Avoiding exposure to nothing (3:45)

In our continuing video series, Peter Gunthorp and Guillermo Cano from FTSE Russell's Research and Analytics team discuss the subtleties and challenges of combining multiple factors in one index.

 

Factor Indexing: The power of tilting (5:50)

There are many different ways of combining multiple factors in one index. In this final video, Peter Gunthorp and Guillermo Cano from FTSE Russell’s Research and Analytics team look at the pros and cons of different approaches.

 

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.

 

2016 Smart beta survey (1:36)

FTSE Russell is proud to present the third annual survey of global institutional asset owner’s attitudes toward, understanding of and implementation of smart beta indexing. Each year, we have recruited equity decision makers from across a broad spectrum of AUM tiers and at a variety of stages in their evaluation of smart beta. And each year, participation by global asset owners has increased, with over 250 asset owners responding in 2016.

 

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