An Examination of Traditional Style Indexes

Journal of Index Investing, vol. 1, no. 2, Fall 2010, pp. 14-23

Posted: 2 Aug 2010 Last revised: 28 Dec 2016

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Vitali Kalesnik

Research Affiliates LLC

Himanshu Surti

Cambria Investment Management

Date Written: 2010

Abstract

For investors using a core–satellite approach to strategic asset allocation, traditional style indices, such as value and small-cap indices, represent convenient passive vehicles for achieving strategic or even tactical portfolio tilts. In this article, the authors examine traditional style indices using the Fama–French three-factor analysis. They find that most of the style indices exhibit a negative Fama–French alpha and statistically conclude that traditional style indices are suboptimal means for creating style tilts in portfolios. They posit that the source of the sub-optimality comes from the cap-weighted construction methodology, which these indices are rooted in and demonstrate that using a simple non-price-weighted approach for creating the style indices would result in more efficient exposures.

Keywords: Value Investing, Small Cap, Risk Models, Style Indexes

JEL Classification: G10, G12, G14

Suggested Citation

Hsu, Jason C. and Kalesnik, Vitali and Surti, Himanshu, An Examination of Traditional Style Indexes (2010). Journal of Index Investing, vol. 1, no. 2, Fall 2010, pp. 14-23. Available at SSRN: https://ssrn.com/abstract=1651199 or http://dx.doi.org/10.2139/ssrn.1651199

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Vitali Kalesnik (Contact Author)

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Himanshu Surti

Cambria Investment Management ( email )

2321 Rosecrans Ave
Suite 3225
El Segundo, CA 92045
United States

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