Scientific Beta

Funds Europe: "Given turnover and capacity problems, Noël Amenc, Felix Goltz and Nicolas Gonzalez of the EDHEC-Risk Institute assess how easy it is to invest in smart beta equity indices".

Funds Europe December/January 2015

"(…) Given turnover and capacity problems, Noël Amenc, Felix Goltz and Nicolas Gonzalez of the EDHEC-Risk Institute assess how easy it is to invest in smart beta equity indices. (...) The arrival of smart beta equity indices has raised a major question on their investability: at what cost will investors be able to trade the index constituents in the same proportions as the underlying strategy? In fact, departing from the traditional cap-weighting investment scheme leads to risks that are sizable and that vary significantly. These include common exposures to systematic risk factors such as size and liquidity. Smart beta indices exhibit higher levels of turnover than their cap-weighted counterparts. Importantly, for any level of liquidity, the level of turnover in the index will impact the performance of the tracking fund through the frequency of occurrence of transaction costs. A key implication is that the smart beta index turnover and capacity constraints need to be methodologically and carefully handled through the construction of the index. (...)"