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Research & Insights

Factor exposure indexes - Momentum factor

In this paper we construct and investigate the properties and robustness of a set of momentum factors. We also construct illustrative indexes, based on a preferred momentum definition and show that the resulting indexes exhibit a substantial exposure to momentum and relatively low levels of turnover.

We identify candidate momentum factors from a survey of the academic literature and current market practice. The candidate factors are assessed and formation and holding periods examined for the FTSE Developed universe over the period 2001 – 2014.

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Factor exposure indexes - Index construction methodology

The premise of a factor approach to indexes is to construct a stock index that has an intentional and greater exposure to a factor of interest than a given benchmark. By factor, we mean a stock level characteristic such as volatility or value represented by for example, Book to Price. When the benchmark is the Market Portfolio and a positive excess return (or factor premium) exists over the long term, this is often termed a “factor anomaly”, contradicting as it does the “Efficient Market Hypothesis”.

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The Russell 2000® Index: 30 years of small cap

  • Russell Investments introduced the Russell 2000 Index in 1984 as the first small cap benchmark.
  • The Russell 2000 has since been widely adopted by both institutional and retail investors for measuring performance in the small cap U.S. equity market, due to its accurate, comprehensive methodology.
  • A large body of research has documented the potential benefits of including small cap stocks within a diversified, global, multi-asset-class portfolio.
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Benefits of fundamentally weighted indexes in less efficient markets

Key benefits:

  • Historically delivered excess index return over time relative to the market cap-weighted counterpart in all global market segments, with the greatest outperformance in the least-efficient markets.
  • Historically achieved improved risk-adjusted index returns and greater upside returns than downside losses, with moderate tracking error relative to the cap-weighted counterpart.
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