RT Journal Article
SR Electronic
T1 The Smart Beta Indexing Puzzle
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 97
OP 119
DO 10.3905/jii.2014.5.1.097
VO 5
IS 1
A1 Zélia Cazalet
A1 Pierre Grison
A1 Thierry Roncalli
YR 2014
UL https://pm-research.com/content/5/1/97.abstract
AB In this article, the authors consider smart beta indexing, which is an alternative to capitalization-weighted (CW) indexing. In particular, the authors focus on risk-based (RB) indexing, the aim of which is to capture the equity risk premium more effectively. To achieve this, portfolios are built that are more diversified and less volatile than CW portfolios. However, RB portfolios are less liquid than CW portfolios by construction. Moreover, they also present two risks in terms of passive management: tracking difference risk and tracking error risk. This article examines the trade-off relationships that smart beta investors have to puzzle out among diversification, volatility, liquidity, and tracking error. The authors also define the return components of smart beta indexes.TOPICS: Mutual funds/passive investing/indexing, analysis of individual factors/risk premia, portfolio construction