Tilt Nickels to Diamonds: An Orthogonalization Approach

Journal of Investment Management, 2019, 17 (4), 1-19.

30 Pages Posted: 14 Apr 2014 Last revised: 25 Sep 2019

See all articles by Wenfeng Wu

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

George Xiang

International College, Renmin University of China

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: March 1, 2019

Abstract

Alternative index products often achieve improved performance at the cost of increased exposure to risk. In this study, we propose a portfolio tilting strategy that alleviates the risks inherent to alternative indices by projecting fundamental factors on risk factors to purge the influence of risk factors. We argue that more efficient indices can be built on the resulting orthogonalized fundamental factors and show that a tilted equity index using return on assets, long-term debt, and net sales as fundamental factors outperforms the Russell 1000 index by 120 basis points from 1987 to 2014.

Keywords: Indexing, Smart Beta, Tilting, Enhanced Index, Portfolio Efficiency

JEL Classification: G11, G12

Suggested Citation

Wu, Wenfeng and Xiang, George and Yu, Tong, Tilt Nickels to Diamonds: An Orthogonalization Approach (March 1, 2019). Journal of Investment Management, 2019, 17 (4), 1-19. , Available at SSRN: https://ssrn.com/abstract=2424154 or http://dx.doi.org/10.2139/ssrn.2424154

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

George Xiang

International College, Renmin University of China ( email )

158 Renai Road
Suzhou Industrial Park
Suzhou, Jinsu 215123
China
0512--6260 5288 (Phone)

Tong Yu (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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