Traditional stock indexes, like the Dow Jones Industrial Average (DJI), the S&P 500, the FTSE 100 act as benchmarks for the broader market's performance. These indexes are typically constructed and weighted based on a single factor, such as price or market capitalization. While this simplicity has its advantages, it can also limit the potential to capture more nuanced market dynamics.
In recent years, the emergence of factor investing has opened up new possibilities for constructing and managing portfolios. By focusing on multiple factors such as value, size, quality, yield, profitability, and leverage, investors can potentially achieve a better informed exposure to market risks and opportunities.
This article explores an advanced approach to index rebalancing that extends the single-factor methodologies. We will analyse a multi-factor strategy that incorporates various financial metrics, economic and cross-market indicators and dynamically adjusts the index composition based on which factors are predicted to perform best in the following month.
By comparing this multi-factor index to a conventional index, we aim to demonstrate how a more comprehensive approach to weighting and rebalancing can lead to improved returns and better risk management.
The full article can be found here