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The Journal of Index Investing

The Journal of Index Investing

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Article

A New Metric for Smart Beta: Factor Exposure per Unit of Tracking Error

Jennifer Bender, Xiaole Sun and Taie Wang
The Journal of Index Investing Fall 2016, 7 (2) 109-118; DOI: https://doi.org/10.3905/jii.2016.7.2.109
Jennifer Bender
is a managing director at State Street Global Advisors in Boston, MA. jennifer_bender@ssga.com
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Xiaole Sun
is a principal at State Street Global Advisors in Boston, MA. xiaole_sun@ssga.com
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Taie Wang
is a vice president at State Street Global Advisors in Hong Kong. taie_wang@ssga.com
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  • For correspondence: taie_wang@ssga.com
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Abstract

What does success look like for smart beta indexes? The authors argue that success is the ability of an index to provide a strong and consistent level of exposure to the targeted factor(s). Moreover, exposure should be achieved in a risk-aware way. Risk taken relative to the capitalization-weighted benchmark is active risk, and investors should be compensated with greater exposure to their targeted factor(s). The authors provide guidance on how indexes can be built with this measure in mind via screening and weighting decisions. Because screening and weighting decisions move tracking error and exposure in the same direction, most rules-based indexes naturally provide reasonably strong exposure per unit of tracking error.

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The Journal of Index Investing: 7 (2)
The Journal of Index Investing
Vol. 7, Issue 2
Fall 2016
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A New Metric for Smart Beta: Factor Exposure per Unit of Tracking Error
Jennifer Bender, Xiaole Sun, Taie Wang
The Journal of Index Investing Aug 2016, 7 (2) 109-118; DOI: 10.3905/jii.2016.7.2.109

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A New Metric for Smart Beta: Factor Exposure per Unit of Tracking Error
Jennifer Bender, Xiaole Sun, Taie Wang
The Journal of Index Investing Aug 2016, 7 (2) 109-118; DOI: 10.3905/jii.2016.7.2.109
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  • Article
    • Abstract
    • A NEW METRIC: FACTOR EXPOSURE PER UNIT OF TRACKING ERROR
    • HOW TO BUILD PORTFOLIOS WITH HIGH FACTOR EXPOSURE PER UNIT OF TRACKING ERROR
    • USING SECURITY SELECTION TO ACHIEVE HIGH LEVELS OF EXPOSURE PER UNIT OF TE
    • USING SECURITY WEIGHTING TO ACHIEVE HIGH LEVELS OF EXPOSURE PER UNIT OF TE
    • FURTHER CONSIDERATIONS
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

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