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
Date Written: 2010
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: Suggested Citation