A Global Country Allocation Framework: A New Paradigm for Constructing an International Fund-of-Funds ETF

Abstract

This article introduces a unique investment paradigm that provides a blueprint for developing enhanced international indexes and fund-of-funds exchange-traded funds using the principles of multifactor investing. The paradigm has multiple elements, which are encapsulated in a framework. The paradigm goes beyond the common features of smart beta investing by introducing two new components to help build robust forms of multifactor portfolios. One of these components can help alleviate the difficulties faced in weighting factors when blending them to create a multifactor portfolio, which generates risk premiums in every stage of an equity life cycle. The other component—Fama–Macbeth regression methodology—assists in deriving a superior set of drivers of returns for the underlying constituents of any benchmark.

TOPICS: Exchange-traded funds and applications, factor-based models, global