Scientific Beta

ETF Strategy: "In a recent research paper, entitled "Managing Sector Risk in Factor Investing," the index provider focused on the implicit sector risk taken by factor indices and analysed the implications for their short- and long-term risk-adjusted performance. The firm, which is affiliated to EDHEC-Risk Institute, used a comparison between standard factor indices and their sector-neutral counterparts. The authors of the report found that sector-neutrality adds value in terms of reducing tracking error and short-term underperformance with respect to the reference cap-weighted index."

ETF Strategy 14/09/2018

"(...) Sector risk is the main explanation for the underperformance of many factor strategies compared to their market cap-weighted benchmarks over the last three years, according to ERI Scientific Beta, a smart beta index provider. In a recent research paper, entitled "Managing Sector Risk in Factor Investing," the index provider focused on the implicit sector risk taken by factor indices and analysed the implications for their short- and long-term risk-adjusted performance. The firm, which is affiliated to EDHEC-Risk Institute, used a comparison between standard factor indices and their sector-neutral counterparts. The authors of the report found that sector-neutrality adds value in terms of reducing tracking error and short-term underperformance with respect to the reference cap-weighted index. De facto, a large share of the underperformance attributed to factors in recent years actually relates to sector biases. Sector-neutrality nonetheless comes with costs in the form of higher volatility and lower factor intensity. (...)"