Factor-based investment approaches are rapidly gaining in popularity in multiple markets thanks to their ability to deliver positive long-term risk-adjusted returns. In fact, FTSE Russell’s annual Smart Beta survey, which looked at whether investors are integrating factors into portfolios, revealed adoption by 58% of asset owners globally in 2019, up 10% since 2018. And within this growing field, multi-factor-based investment approaches are rapidly growing in popularity.
However, not all multi-factor indexes are created equal. The issue of “off-target exposures” remains a common concern for investors experiencing a gap between factor strategy intentions and actual outcomes. As demonstrated in one of our earlier blogs, multi-factor indexes constructed using a Select & Weight (S&W) methodology can have large unwanted exposures to off-target factors, countries and industries. Compared to S&W, factor tilting does not completely eliminate unwanted factors, but can significantly reduce them. Our new Target Exposure indexes employ “corrective tilts” that remove off-target exposures while staying within the our simple and transparent tilting framework.
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