Improving Smart Beta Attribution Analysis - Part II
SUMMARY
INTRODUCTION
In our last research article (read Improving Smart Beta Attribution Analysis), we highlighted the complexity of attribution analysis, which incorporates asset class and factor performance and a fund`s exposure to these. A value-focused smart beta ETF can severely underperform the general stock market, but this is mostly a consequence of the poor performance of the value factor rather than the stock selection process.
Factors are as cyclical as stock markets, which makes single-factor funds risky investments. Multi-factor funds try to mitigate this risk by allocating to multiple factors, but this has not worked well in the U.S. over the last decade (read Market-Neutral versus Smart Beta Factor Investing).
However, how do you run an attribution analysis when the exposure to the factor is time-varying?
In this research article, we will explore an attribution analysis framework for dynamic multi-factor funds.
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