Multi-Factor Portfolio Construction for Passively Managed Factor Portfolios

16 Pages Posted: 5 Dec 2017

See all articles by Jennifer Bender

Jennifer Bender

State Street Global Advisors

Taie Wang

State Street Global Advisors

Date Written: May 29, 2015

Abstract

Transparent rules-based index-tracking portfolios that employ alternative weighting schemes have grown rapidly in the last decade, especially within equities. These passively managed factor portfolios can be constructed in many ways, ranging from relatively simple rules-based approaches that specify weights as a function of factor characteristics to more complex optimization-based ways. Both single factor and multiple factor portfolios can be constructed. In the latter case, one often-asked question is whether it is better to combine individual factor portfolios or build a multi-factor portfolio from the security-level. Here, we show that a bottom-up approach to multi-factor portfolio construction can produce superior results than a combination of individual single factor portfolios, at least for well-known factors such as Value, Quality, Low Volatility, and Momentum. Because the bottom-up approach assigns weights to securities on multiple factor dimensions simultaneously, it accounts for cross-sectional interaction effects in a way that combining single factor portfolios does not.

Keywords: Factor Portfolios, Smart Beta, Multi Factor

Suggested Citation

Bender, Jennifer and Wang, Taie, Multi-Factor Portfolio Construction for Passively Managed Factor Portfolios (May 29, 2015). Available at SSRN: https://ssrn.com/abstract=3080348 or http://dx.doi.org/10.2139/ssrn.3080348

Jennifer Bender (Contact Author)

State Street Global Advisors ( email )

1 Lincoln Street
28th Floor
Boston, MA 02111
United States

Taie Wang

State Street Global Advisors ( email )

68/F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, Hong Kong
Hong Kong

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