A Survey of Alternative Equity Index Strategies

Proceedings of the 7th International Conference on Business and Finance

“…The fundamentally weighted indices assign larger weightings to stocks that are expected to offer the best value in terms of a set of selected fundamental characteristics, rather than using the market value of stocks as the selection criteria. It can also be said that fundamental indexation aims to deliver not only beta (market risk) but instead provide an alternative or smart beta (Chow et al 2011). Fundamentals of companies form the selection criteria, which are used in the construction of a fundamentally weighted index.…”

“…More advanced approaches are challenging the conventional passively managed ETFs by adding a degree of activeness to the index composition (Chow et al 2011). Traditional market capitalisation-weighted ETFs, by means of allocating the weights in the fund according to the market capitalisation of each security, will only offer positive returns to an investor when securities with greater market capitalisation exhibit positive returns.…”

Stochastic portfolio theory optimization and the origin of rule-based investing

“…Chow et al (2011) find that most rule-based, non capweighted allocation strategies outperform their cap-weighted counterparts because of exposure to value and size factors. Leote et al (2012) compare different rule-based, non capweighted allocation strategies on an equity universe (equally weighted portfolio, two variants of risk parity portfolios, the minimum variance portfolio and the maximum diversification portfolio) and analyze the factors behind their risk and performance.…”

How to obtain high returns with lower volatility in emerging markets?

“…Similarly, the risk-weighted index method has a disadvantage in that in some cases it could be concentrated in too few stocks or may require a covariance between stocks to be calculated; due to the higher dimensionality of this covariance matrix it is hard to use this method (Amenc, Goltz, Martellini, & Retkowsky, 2010;Chia, Melas, & Zhou, 2011;Choueifaty & Coignard, 2008;Chow, Hsu, Kalesnik, & Little, 2011;Clarke, de Silva, & Thorley, 2006;Haugen & Baker, 1991). As emerging equity markets have high volatility, it would seem plausible that risk-weighted indexes would be a suitable index option.…”