Comparing Bottom-Up versus Top-Down Multi-Factor Construction

The S&P 500® Quality, Value & Momentum Multi-Factor Index is designed to measure the performance of stocks having the highest combination of quality, value, and momentum (QVM). It takes a “bottom-up” approach of scoring each stock on its individual factor attributes and selecting stocks that jointly score highest across all the factors [1]. In light of the recent market turbulence, let us examine the performance of this index in comparison with the alternative “top-down” approach to multi-factor portfolio construction, i.e., taking an equally weighted combination of single-factor indices, referred to as an “index of indices”. 

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