RT Journal Article
SR Electronic
T1 The Latest Wave in Advanced Beta: Combining Value,
Low Volatility, and Quality
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 67
OP 76
DO 10.3905/jii.2014.5.1.067
VO 5
IS 1
A1 Jennifer Bender
A1 Eric Brandhorst
A1 Taie Wang
YR 2014
UL https://pm-research.com/content/5/1/67.abstract
AB The latest wave in advanced beta, also known as smart beta, factor investing, and risk premia investing, among other names, has focused on combining multiple factors in one portfolio. One of the more widely discussed combinations has been Value, Low Volatility, and Quality, which results in a portfolio with lower-than-average valuation and return volatility, and higher-than-average quality (measured by metrics like profitability, earnings variability, and leverage). In this article, the authors discuss why this combination has been of interest and summarize the key considerations for investing in such a strategy. The intuition behind the three factors as well as the empirical evidence has provided support for the combination. Moreover, the three-factor portfolio attempts to take advantage of potential diversification benefits over time, which dampens the well-known challenge of cyclicality in advanced beta strategies, a key hurdle in implementation.TOPICS: Analysis of individual factors/risk premia, portfolio construction, volatility measures