Factor Investing in Practice: Performance and Risk Exposure of U.S. Factor ETFs

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School of Business | Bachelor's thesis
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Date

2018

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Rahoitus

Language

en

Pages

31

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Abstract

I examine U.S. factor ETFs’ performance relative to the academic factor portfolios’ and evaluate their risk exposures with several asset pricing models. I find that ETFs investing in size, value, momentum, and low volatility strategies offer exposure to the intended factors but the market factor remains as the main driver of their returns. Factor ETFs’ performance seems to follow that of long-only rather than long-short factor portfolios, and due to the high market exposure, they have significant co-movement with each other. Despite these drawbacks, factor ETFs have offered higher returns and Sharpe ratios than their respective long-short counterparts, which gives support for the long-only approach to factor investing.

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Thesis advisor

Jylhä, Petri

Keywords

asset pricing, ETF, factor investing, risk factor, smart beta

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https://urn.fi/URN:NBN:fi:aalto-201902171646

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[kand] Kauppakorkeakoulu / BIZ (Open Access)