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13 Μαΐ 2020 · There is a subtle but important distinction between factors and factor indices. “Factor” denotes an attribute with which long-term excess returns are thought to be associated. Fama and French, for instance, famously found that small size and cheap valuation were factors in this sense.
The MSCI Index Glossary intends to offer clarity and understanding of some essential terms and concepts involved in the creation and maintenance of various index methodologies. By providing concise definitions and explanations, this glossary aims to serve as a useful reference for MSCI clients in relation to indexing.
Indices such as the S&P 500 Value, S&P 500 Pure Value, and S&P 500 Enhanced Value Index use three fundamental measures. Book-to-price: Calculated as a company’s latest book value per share divided by price. Earnings-to-price: Calculated as a company’s latest earnings per share divided by price.
The MSCI Factor Indexes are rules-based indexes that capture the returns of systematic factors that have historically earned a persistent premium over long periods of time—such as Value, Low Size, Low Volatility, High Yield, Quality and Momentum.
MSCI Factor Indexes are rules-based, transparent indexes targeting stocks with favorable factor characteristics – as backed by robust academic findings and empirical results. They are designed for simple implementation, replicability, and use for both traditional passive and active mandates.
Factor indices can help the clients of specialist managers disentangle how much of the manager’s performance is attributable simply to factor exposure, and how much is attributable to the manager’s stock selection beyond the factor. Like their first-generation counterparts, factor indices can be used as both benchmarks and investment vehicles.
Factor investing is the investment process that aims to harvest these risk premia through exposure to factors. We currently identify six equity risk premia factors: Value, Low Size, Low Volatility, High Yield, Quality and Momentum.
