Pub Date : 2019-03-31DOI: 10.3905/jii.2019.9.4.001
Brian R. Bruce
{"title":"Editor’s Letter","authors":"Brian R. Bruce","doi":"10.3905/jii.2019.9.4.001","DOIUrl":"https://doi.org/10.3905/jii.2019.9.4.001","url":null,"abstract":"","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42606414","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-03-31DOI: 10.3905/jii.2019.9.4.067
Roy. Henriksson, J. Livnat, P. Pfeifer, M. Stumpp
Empirical studies suggest that the so-called “low volatility anomaly” is actually an artifact of skewness preferences—a tendency of investors to prefer stocks offering upside potential with low likelihood of loss. The authors argue that if skewness preferences underlie the low volatility anomaly, then a naïve low volatility strategy should be dominated by one that explicitly targets expected return skew. This article provides empirical evidence to that effect. It recommends a multi-factor alpha strategy that is based on avoiding index constituents that are perceived to have ex ante high relative skew. These findings have important implications for investors. Specifically, the authors demonstrate that portfolios constructed to avoid high expected skew stocks outperform both low volatility strategies and several widely used US and global capitalization-weighted indices.
{"title":"A Multi-Factor Strategy for Index Alpha Enhancement","authors":"Roy. Henriksson, J. Livnat, P. Pfeifer, M. Stumpp","doi":"10.3905/jii.2019.9.4.067","DOIUrl":"https://doi.org/10.3905/jii.2019.9.4.067","url":null,"abstract":"Empirical studies suggest that the so-called “low volatility anomaly” is actually an artifact of skewness preferences—a tendency of investors to prefer stocks offering upside potential with low likelihood of loss. The authors argue that if skewness preferences underlie the low volatility anomaly, then a naïve low volatility strategy should be dominated by one that explicitly targets expected return skew. This article provides empirical evidence to that effect. It recommends a multi-factor alpha strategy that is based on avoiding index constituents that are perceived to have ex ante high relative skew. These findings have important implications for investors. Specifically, the authors demonstrate that portfolios constructed to avoid high expected skew stocks outperform both low volatility strategies and several widely used US and global capitalization-weighted indices.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2019.9.4.067","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48208902","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-03-31DOI: 10.3905/jii.2019.9.4.006
James J. Rowley, Charles J. Thomas, Ryan E. O’Hanlon
In this article, the authors analyze the effect of time of day on the average bid/ask spread of an exchange-traded fund (ETF). They examine a cross-section of 55,781 intraday spread observations generated by 744 US-domiciled ETFs in 2017, controlling for fund category, trading volume, and issuer. The authors find that, both before and after they add controls, average spreads are highest in the early morning, supporting the argument that investors should avoid trading near market open. Before controls, average spreads are tightest in the late afternoon. After controls, they appear elevated during the final five minutes. However, because volume increases substantially during that period, spreads still appear tighter overall. Therefore, our analysis does not support the argument that investors should avoid trading near market close. Unexpectedly, after controls, the authors find higher spreads during Federal Open Market Committee announcements. This suggests that investors should be vigilant when trading at such times.
{"title":"Examining Intraday ETF Liquidity: When Should Investors Trade?","authors":"James J. Rowley, Charles J. Thomas, Ryan E. O’Hanlon","doi":"10.3905/jii.2019.9.4.006","DOIUrl":"https://doi.org/10.3905/jii.2019.9.4.006","url":null,"abstract":"In this article, the authors analyze the effect of time of day on the average bid/ask spread of an exchange-traded fund (ETF). They examine a cross-section of 55,781 intraday spread observations generated by 744 US-domiciled ETFs in 2017, controlling for fund category, trading volume, and issuer. The authors find that, both before and after they add controls, average spreads are highest in the early morning, supporting the argument that investors should avoid trading near market open. Before controls, average spreads are tightest in the late afternoon. After controls, they appear elevated during the final five minutes. However, because volume increases substantially during that period, spreads still appear tighter overall. Therefore, our analysis does not support the argument that investors should avoid trading near market close. Unexpectedly, after controls, the authors find higher spreads during Federal Open Market Committee announcements. This suggests that investors should be vigilant when trading at such times.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2019.9.4.006","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45772634","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
ESG- (Environment, Social, and Governance) oriented strategies have become desirable among individual and institutional investors in recent years, corresponding with qualities desired by entrepreneurial employees, investors, and community stakeholders. Consistent with a long-term, value-creating orientation, entrepreneurs forgo immediate rewards and devote enormous resources to advance their vision. It is this group that the author studies. The research concludes that entrepreneurial organizations develop stronger governance traits compared with “typical” companies. Perhaps, in part, because the cause represents more than financial rewards, entrepreneurial owners pursue a more focused perspective shared by key stakeholders. The analytics indicate that an entrepreneur factor exists, and is one of the most significant factors in explaining excess returns. These entrepreneurs also contribute measurable ESG benefits. The author provides a detailed analysis of an Entrepreneur Index, spanning several positive and negative economic cycles that points to a consistent conclusion. The evidence suggests investment managers, especially those interested in ESG, would be wise to partake in an entrepreneur approach.
{"title":"Entrepreneurs Breed ESG-Rich Companies: Reap Exceptional Returns as Harvest Byproduct","authors":"Joel M. Shulman","doi":"10.3905/jii.2019.1.065","DOIUrl":"https://doi.org/10.3905/jii.2019.1.065","url":null,"abstract":"ESG- (Environment, Social, and Governance) oriented strategies have become desirable among individual and institutional investors in recent years, corresponding with qualities desired by entrepreneurial employees, investors, and community stakeholders. Consistent with a long-term, value-creating orientation, entrepreneurs forgo immediate rewards and devote enormous resources to advance their vision. It is this group that the author studies. The research concludes that entrepreneurial organizations develop stronger governance traits compared with “typical” companies. Perhaps, in part, because the cause represents more than financial rewards, entrepreneurial owners pursue a more focused perspective shared by key stakeholders. The analytics indicate that an entrepreneur factor exists, and is one of the most significant factors in explaining excess returns. These entrepreneurs also contribute measurable ESG benefits. The author provides a detailed analysis of an Entrepreneur Index, spanning several positive and negative economic cycles that points to a consistent conclusion. The evidence suggests investment managers, especially those interested in ESG, would be wise to partake in an entrepreneur approach.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2019.1.065","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45559631","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The article examines information content of Environment, Social, and Governance (ESG) from a factor exposure perspective. The author uses an integration approach of ESG in portfolio construction by using four broader MSCI USA ESG indices. The analyses have been done using risk-return, CAPM, Fama-French three-factor, Fama-French-Carhart four-factor, Fama-French five-factor, and Fama-French-Carhart six-factor asset pricing models since the inception of each of the four ESG indices. The author finds that most of the returns of these four indices are explained by the CAPM market factor and different asset pricing factors are significantly associated with returns of these ESG indices. The analyses show that there is no information content in the overall ESG score in constructing a portfolio; instead asset managers should incorporate relevant parameters forming part of the overall ESG score in their portfolio construction. The institutional investors should perform their duty of helping poorly ranked companies, with regard to ESG in changing their structural framework and thereby improve their overall ESG scores and then gaining through ESG momentum.
{"title":"ESG: Alpha or Duty?","authors":"Rajnish Kumar","doi":"10.3905/jii.2019.1.066","DOIUrl":"https://doi.org/10.3905/jii.2019.1.066","url":null,"abstract":"The article examines information content of Environment, Social, and Governance (ESG) from a factor exposure perspective. The author uses an integration approach of ESG in portfolio construction by using four broader MSCI USA ESG indices. The analyses have been done using risk-return, CAPM, Fama-French three-factor, Fama-French-Carhart four-factor, Fama-French five-factor, and Fama-French-Carhart six-factor asset pricing models since the inception of each of the four ESG indices. The author finds that most of the returns of these four indices are explained by the CAPM market factor and different asset pricing factors are significantly associated with returns of these ESG indices. The analyses show that there is no information content in the overall ESG score in constructing a portfolio; instead asset managers should incorporate relevant parameters forming part of the overall ESG score in their portfolio construction. The institutional investors should perform their duty of helping poorly ranked companies, with regard to ESG in changing their structural framework and thereby improve their overall ESG scores and then gaining through ESG momentum.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-02-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2019.1.066","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44420709","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-30DOI: 10.3905/jii.2018.9.3.024
Tarjei Kristiansen
This article presents the first description and analysis of the exchange-traded notes (ETNs) and certificates tracking the Nordic power futures market that enable retail investors to hedge and trade on the Oslo and Stockholm Nordic stock exchanges. We investigate the impacts of the underlying front-quarter futures contract, its daily change, the roll cost, the EUR/NOK and EUR/SEK exchange rates, and the interest rate level and fees on the ETNs and certificates. An analysis of the ETNs and certificates on the Nordic stock exchanges from December 2010 to February 2015 shows continual investment activity, even though prices were in a consistent downtrend during the period. We conclude with a description of some strategies which retail investors can use.
{"title":"Financial ETNs and Certificates on Nordic Power Contracts","authors":"Tarjei Kristiansen","doi":"10.3905/jii.2018.9.3.024","DOIUrl":"https://doi.org/10.3905/jii.2018.9.3.024","url":null,"abstract":"This article presents the first description and analysis of the exchange-traded notes (ETNs) and certificates tracking the Nordic power futures market that enable retail investors to hedge and trade on the Oslo and Stockholm Nordic stock exchanges. We investigate the impacts of the underlying front-quarter futures contract, its daily change, the roll cost, the EUR/NOK and EUR/SEK exchange rates, and the interest rate level and fees on the ETNs and certificates. An analysis of the ETNs and certificates on the Nordic stock exchanges from December 2010 to February 2015 shows continual investment activity, even though prices were in a consistent downtrend during the period. We conclude with a description of some strategies which retail investors can use.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2018.9.3.024","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48988180","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-30DOI: 10.3905/jii.2018.9.3.018
W. Thatcher
Indexes tend to beat active managers in the top-performing US equity asset classes and trail active management in the worst-performing US equity categories. It is hypothesized that the reason for this performance pattern concerns style differences between index and active funds. Indexes are more style pure than corresponding actively managed funds. As a result, indexes are harder to beat when their style is in favor and easier to beat when their style is out of favor. This idea is called the Purity Hypothesis. Data is presented showing that the Purity Hypothesis constitutes a reasonable explanation for the performance differences between index and active funds.
{"title":"When Indexing Wins and When It Doesn’t in US Equities: Updating and Extending the Purity Hypothesis","authors":"W. Thatcher","doi":"10.3905/jii.2018.9.3.018","DOIUrl":"https://doi.org/10.3905/jii.2018.9.3.018","url":null,"abstract":"Indexes tend to beat active managers in the top-performing US equity asset classes and trail active management in the worst-performing US equity categories. It is hypothesized that the reason for this performance pattern concerns style differences between index and active funds. Indexes are more style pure than corresponding actively managed funds. As a result, indexes are harder to beat when their style is in favor and easier to beat when their style is out of favor. This idea is called the Purity Hypothesis. Data is presented showing that the Purity Hypothesis constitutes a reasonable explanation for the performance differences between index and active funds.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2018.9.3.018","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48193988","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-30DOI: 10.3905/jii.2018.9.3.001
Brian R. Bruce
We open the Winter issue with Bioy and Lamont who provide an overview of the global landscape of indextracking sustainable funds, looking at trends in asset growth, asset f lows, and product development. They focus on the two regions where these funds have seen the greatest adoption, Europe and the United States. Thatcher discusses the Purity Hypothesis—the idea that indexes are harder to beat when their style is in favor and easier to beat when their style is out of favor. Data is presented showing that the Purity Hypothesis constitutes a reasonable explanation for the performance differences between index and active funds. Next, Kristiansen presents the first description and analysis of the exchange-traded notes (ETNs) and certificates tracking the Nordic power futures market that enable retail investors to hedge and trade on the Oslo and Stockholm Nordic stock exchanges. They investigate the impacts of the underlying front-quarter futures contract, its daily change, the roll cost, the EUR/NOK and EUR/SEK exchange rates, and the interest rate level and fees on the ETNs and certificates. To conclude this issue, Fethke and Prokopczuk use a comprehensive dataset of first-, second-, and third-generation commodity indexes, to investigate the potential diversification benefits in equity-bond portfolios. They present new evidence showing that the performance of the third generation of commodity indexes is less clear-cut than found in existing studies. As always, we welcome your submissions. Please encourage those you know who have papers or have made good presentations on indexing, ETFs, mutual funds, or related subjects to submit them for consideration. We value your comments and suggestions, so please email us at journals@investmentresearch.org.
{"title":"Editor’s Letter","authors":"Brian R. Bruce","doi":"10.3905/jii.2018.9.3.001","DOIUrl":"https://doi.org/10.3905/jii.2018.9.3.001","url":null,"abstract":"We open the Winter issue with Bioy and Lamont who provide an overview of the global landscape of indextracking sustainable funds, looking at trends in asset growth, asset f lows, and product development. They focus on the two regions where these funds have seen the greatest adoption, Europe and the United States. Thatcher discusses the Purity Hypothesis—the idea that indexes are harder to beat when their style is in favor and easier to beat when their style is out of favor. Data is presented showing that the Purity Hypothesis constitutes a reasonable explanation for the performance differences between index and active funds. Next, Kristiansen presents the first description and analysis of the exchange-traded notes (ETNs) and certificates tracking the Nordic power futures market that enable retail investors to hedge and trade on the Oslo and Stockholm Nordic stock exchanges. They investigate the impacts of the underlying front-quarter futures contract, its daily change, the roll cost, the EUR/NOK and EUR/SEK exchange rates, and the interest rate level and fees on the ETNs and certificates. To conclude this issue, Fethke and Prokopczuk use a comprehensive dataset of first-, second-, and third-generation commodity indexes, to investigate the potential diversification benefits in equity-bond portfolios. They present new evidence showing that the performance of the third generation of commodity indexes is less clear-cut than found in existing studies. As always, we welcome your submissions. Please encourage those you know who have papers or have made good presentations on indexing, ETFs, mutual funds, or related subjects to submit them for consideration. We value your comments and suggestions, so please email us at journals@investmentresearch.org.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47518911","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we provide an overview of the global landscape of index-tracking sustainable funds, looking at trends in asset growth, asset flows, and product development. We focus on the two regions where these funds have seen the greatest adoption, Europe and the United States. We also examine the broad range of approaches that aim to address various sustainability and investment objectives.
{"title":"Passive Sustainable Funds: The Global Landscape","authors":"Hortense Bioy, Kenneth Lamont","doi":"10.3905/jii.2018.1.063","DOIUrl":"https://doi.org/10.3905/jii.2018.1.063","url":null,"abstract":"In this article, we provide an overview of the global landscape of index-tracking sustainable funds, looking at trends in asset growth, asset flows, and product development. We focus on the two regions where these funds have seen the greatest adoption, Europe and the United States. We also examine the broad range of approaches that aim to address various sustainability and investment objectives.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2018.1.063","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42283991","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a comprehensive dataset of first-, second-, and third-generation commodity indices, we investigate the potential diversification benefits in equity-bond portfolios. The results show that first-generation commodity indices are outperformed by enhanced indices. Second-generation indices provide slightly increased portfolio Sharpe ratios but at the same time they are spanned by benchmark assets. For third-generation commodity indices, the mean-variance spanning hypothesis is rejected but they show heterogenous out-of-sample performances. We thus present new evidence showing that the performance of the third-generation of commodity indices is less clear-cut than found in existing studies.
{"title":"Is Commodity Index Investing Profitable?","authors":"T. Fethke, Marcel Prokopczuk","doi":"10.3905/jii.2018.1.064","DOIUrl":"https://doi.org/10.3905/jii.2018.1.064","url":null,"abstract":"Using a comprehensive dataset of first-, second-, and third-generation commodity indices, we investigate the potential diversification benefits in equity-bond portfolios. The results show that first-generation commodity indices are outperformed by enhanced indices. Second-generation indices provide slightly increased portfolio Sharpe ratios but at the same time they are spanned by benchmark assets. For third-generation commodity indices, the mean-variance spanning hypothesis is rejected but they show heterogenous out-of-sample performances. We thus present new evidence showing that the performance of the third-generation of commodity indices is less clear-cut than found in existing studies.","PeriodicalId":36431,"journal":{"name":"Journal of Index Investing","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jii.2018.1.064","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44877722","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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