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Factor Indexes and Factor Exposure Matching: Like-for-Like Comparisons

Our latest factor research paper introduces empirical evidence of what academics have been telling us for many years – that factor exposures matter. Factor exposures are important drivers of portfolio performance and in many practical cases, the dominant drivers.

In this paper, we test the hypothesis that well-diversified portfolios with identical factor exposures should have similar performance characteristics, despite originating from potentially very different construction methodologies.

We created simple, diversified portfolios, whose construction and stock composition differed substantially, but displayed identical factor exposures. When we examined the performance characteristics of the two different approaches, we obtained very similar outcomes. However when we compared one popular construction technique, Selection and Weighting, with a Multiple Tilting technique, the analysis showed that the Multiple Tilt approach yielded more efficient diversification and implementation metrics in portfolios.

For more information about factors, read the first paper in this series, "Factor Exposure and Portfolio Concentration."