RT Journal Article
SR Electronic
T1 A New Metric for Smart Beta: <em>Factor Exposure per Unit of Tracking Error</em>
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 109
OP 118
DO 10.3905/jii.2016.7.2.109
VO 7
IS 2
A1 Jennifer Bender
A1 Xiaole Sun
A1 Taie Wang
YR 2016
UL https://pm-research.com/content/7/2/109.abstract
AB 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.TOPICS: Analysis of individual factors/risk premia, portfolio construction, performance measurement