Index Fund Management: A Practical Guide to Smart Beta, Factor Investing, and Risk Premia

1 Introduction: What we talk about in factor investingPART I2. Stepping up to factor investing2.1. History of significant advances in indices and indexed funds2.2. Growth and adaptation of factor strategies2.3. The taxonomy of risks and returns2.4. Factor investing versus traditional index and active2.5. The misconception of factor investing in the press 2.6. Consideration when looking at factor investing2.7. Concluding remarks3. Architecture and art of indexation3.1. Why index architecture matters3.2. Representativeness of the index strategy3.3. Modularity of an index3.4. Availability: the amount of stocks and bonds outstanding3.5. Stock and bond weightings3.5.1. Market value weighting3.5.2. Equal weighting3.5.3. Price weighting3.5.4. Outcome-oriented weighting: Tilting and optimisation3.6. Index maintenance and operations 3.7. Replication and management of index funds3.7.1. Trading strategies3.7.2. Securities lending3.7.3. Cash management3.8. Crowding risk of index funds3.9. The capacity of index funds3.10. Concluding remarks4 Equity Factor Investing: Value Stocks4.1 Schools of value investing4.2 The value and growth debate4.3 Intrinsic value4.4 Systematic screening approaches4.4.1 Benjamin Graham screen4.4.2 Price-to-book screen4.4.3 Price-to-Earning screen4.4.4 Price-to-sales ratio4.4.5 Comparison and combination of screens4.4.6 What constitutes good screen criteria? 4.5 Behavioural drivers of value factor4.6 Market structure and reward for risk4.7 Considerations for value investing4.8 Concluding remarks5 Equity Factor Investing: High Quality5.1 Investment horizon for quality5.2 Quality factor screens5.2.1 Profitability screen5.2.2 Asset growth and investment screen5.2.3 Leverage screen5.2.4 Earning accruals screen5.2.5 Corporate governance screen5.2.6 Combined quality screens among practitioners5.3 Drivers of the quality premium5.4 Quality and valuation of stocks5.5 Consideration for quality strategies 5.6 Concluding remarks6 Equity Factor Investing: Low Risk6.1 Why considering low volatility factor investing?6.2 Low-risk factor approaches and construction6.3 Common low volatility factor indices6.4 Behavioural drivers of the factor premium6.5 Market structures driving the factor premium6.6 Considerations when implementing low volatility strategies6.7 Low volatility in asset allocation6.8 Concluding remarks7 Equity Factor Investing: Momentum7.1 Evolution of momentum investing7.2 Rules-based momentum index strategies7.2.1 Cross-sectional momentum strategies7.2.2 Time series momentum strategies7.3 Market-based index strategies7.4 Behavioural drivers of momentum premium7.4.1 Herding behaviour7.4.2 Representativeness and Confirmation bias7.5 The reward for risk and market structures7.6 Consideration for momentum strategies7.7 Concluding remarks8 Equity Factor Investing: Size8.1 Defining the size factor8.2 Construction of size-based index strategy8.3 The existence of the size premium 8.4 Risk-based explanation of the size premium 8.5 Non-risk based explanation 8.5.1 The January effect 8.5.2 Inefficient pricing 8.5.3 Atten