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Combining Factors


Asset owners and asset managers are increasingly interested in so-called “smart beta” indexes, a category that includes factor and alternatively weighted indexes. In a series of four FTSE Russell Insights, we explore the concept of factors in depth. We examine the differences between factor indexes and other types of smart beta index, illustrate how factor exposure is embedded in an index and suggest how factors can be combined.

In this Insights, the fourth of the series, we explore the latter topic: how best to combine factors.

Rising demand to combine smart beta strategies

According to the 2015 FTSE Russell Smart Beta survey, combining factors is a topic of increasing interest to a broad range of investors. Responses to the survey, which came from 214 asset owners around the globe, with estimated collective assets under management of over U.S.$2 trillion, revealed:

  • 70% of respondents with a current allocation to smart beta, a broad category that includes factor index-based approaches, are using two or more smart beta strategies
  • 47% of respondents, including both current users and non-users of smart beta strategies, have evaluated or are currently evaluating multi-factor combinations
  • The average number of smart beta strategies evaluated by respondents, including both current users and non-users of smart beta strategies, is four;
  • Among those respondents who evaluated more than one smart beta strategy, the most commonly stated objective (given by more than half the respondents) was to gain understanding of how the strategies worked in combination.
     

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