Exposure to value, size and momentum factors explains the excess returns from alternative index strategies.
This alternative index, he argues, does a much better job of explaining the pace of economic activity than conventional measures.
The authors did acknowledge that alternative index products do represent a potentially efficient way for investors to buy the risk factors.
In A Survey of Alternative Equity Index Strategies, recently published by Tzee-Man Chow, Jason Hsu, Vitali Kalesnik, and Bryce Little, several popular alternative index strategies are analyzed.
They could also purchase one of the many alternative-weighted index funds that use fundamental factors, such as the Powershares FTSE RAFI US 1500 Small-Mid Index ETF (Ticker: PRFZ).
Wallman has a patent on an alternative: an intelligent index fund that tracks the collective portfolio decisions of several thousand individual investors.
Alternative indexes have added another dimension to index funds and ETFs over the past decade.
The returns from the alternative strategies were tested against the traditional index benchmarks before and after adjusting for the Carhart Four-Factor Model.
Traditional capitalization-weighted index funds are lower cost, while alternative indexes often have higher exposures to size and value factors.
Investors should weigh the risks embedded in alternative indexes as well as the higher cost of these index funds and ETFs before buying into the strategy.
These results are before fees, and alternative indexes have higher fees than low-cost beta-seeking index funds.
But for investors who find buy-and-hold hopelessly boring and index funds too plain to bear, ETFs offer a relatively safe alternative when used in moderation.
Andreas Utermann, a director at Mercury Asset Management, thinks a euro index will underperform a broader, pan-European benchmark and should therefore not be marketed as a better alternative to clients.
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