Passive indexation through the use of Exchange Traded Funds (ETF) is a highly popular strategy world-wide which helps investment managers diversify their risk profiles and long the market for certain segments of their portfolio while maintaining little tracking error. We want to introduce the advantages of rules based investing which can be implemented and packaged as ETFs and provide managers with returns that are easier to explain, such as indexation, but offer greater return upside and control associated risks. Alternative investment strategies are often overlooked and we will show the advantages of rules based strategies in this paper.By combining Piotroski’s fundamental indicators defining ‘Quality’ and using screeners/rankers of relative valuation, we intend to define a strategy that provides excess return while maintaining similar risk. In addition, we aim to lower volatility through risk management techniques, which will insulate the strategy from systematic factors by shorting a calculated percentage of the market.Through this exercise we show the significant advantages to investing in alternative and ‘smart beta’ strategies compared to indexation in our sample period of 2002 to 2014.
MSc in Finance Project-Simon Fraser University
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