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Research & Insights

The objectives of factor indexes

What are factors?

In finance and investment theory, factors are variables that drive equity returns. In recent decades there has been great interest in identifying factors that help explain equities’ behavior, and factor research has been actively pursued across other asset classes, such as fixed income and currencies.

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Inflation-linked bonds

What are inflation-linked bonds?

Inflation-linked bonds are bonds whose interest payments and principal (the payment made by the issuer at maturity) are linked to an index of inflation.

By contrast, the interest payments and principal value of conventional bonds are fixed in nominal (money) terms.

Investors in inflation-linked bonds

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Achieving factor exposure

An equity factor index is intended to offer controlled exposure to a factor or factors. But how does it achieve this goal in practice? There are a number of conceptual and design steps involved in the creation of an equity factor index and in this paper we explore these decisions.

Long/short and long-only factor indexes

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Factor exposures of smart beta indexes

Capitalisation weighted indexes are considered to be representative of the broad market opportunity set and are characterised by high levels of liquidity, investment capacity and relatively low levels of turnover. However, concentration risks that may arise during market bubbles and the inherent factor traits of capitalisation weighted indexes have prompted alternative approaches to index construction, with the resulting indexes commonly referred to as “smart beta”. Smart beta indexes encompass both alternatively weighted and factor indexes.

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Low Volatility or Minimum Variance: An "eyes wide open" discussion

An investor can face a dilemma when looking for assistance in building an investment portfolio. Myriad sources offer advice, often rendering the decisions to be made difficult at best. Soldiering on with the advice and reading through literature, the investor will fairly soon come across a discussion on volatility, as reducing portfolio volatility has been a notable recent theme. Reading on, the investor will shortly realize that although sometimes considered together as “low volatility” strategies, the two most commonly-stated strategies for volatility are very different.

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Smart beta: 2015 survey findings from U.S. financial advisors

Factor-based and alternatively-weighted indexes have transformed the current investment landscape. These indexes, generically called “smart beta indexes” are weighted differently than traditional market-value or capitalization-weighted indexes, providing new tools to help tailor exposures to specific risk and return objectives. For the purpose of this study we will use the term “smart beta” or “smart beta products” to refer to an investable product such as a mutual fund or ETF that closely tracks one of these indexes.

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FTSE country classification process

This paper describes the FTSE country classification process which is designed to be transparent and evidence-driven. External advisory committees ensure that the criteria used to determine country classification meet the needs of global investors and are judged objectively. Consistent with the Principles for Financial Benchmarks published by IOSCO in 2013, the operation of the country classification process is overseen by FTSE’s strong internal governance structure.

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International equity investment and the U.S. dollar - Introducing the FTSE International Hedged 50% to USD Index Series

  • Many U.S. based investors seek diversification benefits by investing in international equities. Unhedged international investing however, adds foreign exchange (FX) risk in the form of an embedded currency basket, which contains long positions in foreign currencies coupled with a 100% short position in the U.S. dollar (USD).
  • While financial theory argues the long-term payoff to currency exposure should be zero, currency fluctuations can have a significant effect on investment returns and volatility over short and even medium-term investment time horizons.
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How indexes change

Coping with market changes

Financial markets change continuously: markets increase and decrease in relative size, companies are listed, delisted, taken over and restructured, and securities produce cash flows. An important challenge for an index provider is to record the evolution of markets in a consistent and transparent way.

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