Index Strategies

RAFI Multi-Factor Indices

AT A GLANCE

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Uses empirically robust single-factor strategies
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Diversifies factor exposures for a smoother ride
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Implements a rules-based, transparent index

The RAFI Multi-Factor Index strategy offers diversified factor exposures through equally weighted allocations to value, low volatility, quality, momentum, and size.

Single-factor indices linked to robust factors (those factors supported by theoretical and empirical evidence shown to produce excess returns across multiple periods and across geographies) offer investors the potential to earn a return premium relative to market-capitalization indices. Single-factor indices, however, may have high tracking error and can be prone to long periods of underperformance. By combining multiple factor exposures, investors can achieve increased diversification and lower tracking error, resulting in a smoother path to outperformance relative to a single-factor approach.

The RAFI Multi-Factor Index strategy equally weights the five factors of value, low volatility, quality, momentum, and size. The RAFI Value Factor Index, RAFI Low Volatility Factor Index, RAFI Quality Factor Index, and RAFI Size Factor Index are also available on a stand-alone basis to provide investors with a range of choices to meet their unique preferences.

Thoughtfully designed to deliver for investors

The RAFI Multi-Factor Index Strategy

Equally weights these five theoretically and empirically robust single-factor strategies:

  • Value - The value premium delivers because performance chasers under-own value securities, preferring fast-growing glamour stocks.
  • Low Volatility - The low-volatility premium delivers because investors’ preference for gambling leads them to over-own high-volatility securities, effectively as lottery tickets.
  • Quality - The quality premium delivers because investors are attracted to the glamour of empire-building companies and underappreciate conservative capital allocators with wide economic moats.
  • Momentum - The momentum premium delivers because uninformed investors are slow to react to new information about a company.
  • Size – The preceding factor premiums tend to work better in small-capitalization markets because these markets tend to be less efficient and experience larger pricing errors.

 

Diversifies exposures to factors expected to produce long-term positive excess returns. Diversifying the factors in a portfolio substantially lowers tracking error and provides shorter periods of underperformance compared to a single-factor strategy. This diversification allows for a smoother path to outperformance. Each single-factor strategy (excluding momentum) is fundamentally weighted to break the link between price and weight, thus avoiding exposure to trendy, overpriced securities.

Incorporates thoughtful design and implementation that allows for straightforward performance measurement and governance. Combining the single-factor strategies to create a multi-factor index results in a transparent approach with clear performance attribution, low governance requirements, and low costs.

 

INVESTMENT
PROCESS

RAFI MULTI-FACTOR INDICES
RESOURCES

RAFI Roadmaps provide the theoretical and empirical evidence behind the index strategy as well as current valuations and explain how the valuations translate into expected returns.

Factsheets provide information on recent performance, attribution, characteristics, country/sector weights, and top holdings.

PERFORMANCE SNAPSHOT

Download Performance Snapshot for All Index Strategy Families

Download Time Series Returns with the Performance Module

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