Introduction
Interest in factor investment solutions has grown significantly over the past decade. Factor investing generally refers to an investment strategy that targets specific stock characteristics believed to drive differences in expected long-term returns. This approach is often termed "smart beta" or "strategic beta," as it systematically deviates from traditional market portfolios (market beta). Commonly recognized factors, which have been extensively documented in academic literature and widely adopted in the investment industry, include value, momentum, low volatility and quality. There is considerable evidence suggesting that these factors have contributed to higher performance over historical sample periods. As of March 31, 2025, factor ETFs globally added up to approximately USD 2.5 trillion in assets, compared to USD 542 billion 10 years ago, reflecting a compound annual growth rate (CAGR) of 16.5%.
How do these factors perform in the Australian market? Can investors access factor performance through an indexing approach? What are some applications of factor indices in the Australian market? This paper introduces the S&P/ASX 200 Factor Index Series, which applies the factor investing framework through an indexing approach to measure the performance of low volatility, momentum, quality, value and size.
In the subsequent five sections, we provide concise descriptions of the S&P Dow Jones Indices (S&P DJI) methodology for each of the common factors. We will conduct an in-depth analysis of the performance of the five factor indices and explore potential applications of these indices for performance attribution.
Each introductory section adheres to a consistent framework for presenting the factors. The index universe used to construct the S&P/ASX 200 Factor Index Series is the S&P/ASX 200, designed to measure the performance of the 200 largest eligible stocks listed on the ASX, based on float-adjusted market capitalization. Launched on April 3, 2000, the S&P/ASX 200 allows for back-testing and analysis of long-term performance for each factor—the analysis in this papers starts from June 30, 2000. Every six months, at the end of June and December, we sorted the constituents of the S&P/ASX 200 according to each factor. We then created equal-weighted and market-cap-weighted quintiles from the sorted values, designating Quintile 1 as the stocks with the highest factor exposure and Quintile 5 as those with the lowest. Our focus is on whether Quintile 1 outperforms Quintile 5, with particular emphasis on the performance of Quintile 1 for long-only positions. We will analyze performance from both annualized compound return and risk-adjusted return perspectives.
Low Volatility
Conventional wisdom posits that higher risk correlates with higher expected returns. However, research has demonstrated that lower-risk assets often outperform their higher-risk counterparts over time in the equity market (Ang, Hodrick, Xing and Zhang; 2009). This phenomenon is known as the low volatility factor, which gained traction following the 2008 Global Financial Crisis. Low volatility strategies typically excel in bear markets due to their defensive characteristics, thought they may underperform during bull markets.
