ETFs: What’s Better? Full Replication vs. Representative Sampling?

10.August 2022

ETFs employ two fundamentally distinct methods to replicate their underlying benchmark index. The more conventional method, physical replication, involves holding all constituent securities (full replication) or a representative sample (representative sampling) of the benchmark index. In contrast, the synthetic replication achieves the benchmark return by entering into a total return swap or another derivative contract with a counterparty, typically a large investment bank. As we have previously discussed, there is no significant difference in the tracking ability between the physical and synthetic ETFs in the long term. And while our article compares physical and synthetic ETFs, it does not address the differences between the full replication ETFs and sampling ETFs. Therefore, one may ask a question: “When selecting a physically replicated ETF, which replication method is better, full replication or representative sampling?”

Continue reading

Quantpedia in July 2022

6.August 2022

Hello all,

What have we accomplished in the last month?

– A new ETF Replication report
– 9 new Quantpedia Premium strategies have been added to our database
– 10 new related research papers have been included in existing Premium strategies during the last month
– Additionally, we have produced 10 new backtests written in QuantConnect code
– And finally, 1+3 new blog posts that you may find interesting have been published on our Quantpedia blog in the previous month

Continue reading

The Buffett Indicator

29.July 2022

Despite Warren Buffett’s claim that the MVE/GDP ratio is “probably the best single measure of where valuations stand at any given moment,” its predictive ability has been the subject of relatively little academic scrutiny. A novel paper by Swinkels and Umlauft (2022) fills this gap and examines whether the MVE/GDP ratio can forecast international equity returns, which complements the existing research limited to the United States. A simple trading strategy that invests in countries with the highest model-predicted returns yields statistically significant and economically meaningful alpha over a corresponding buy-and-hold benchmark while experiencing lower volatility and maximum drawdown.

Continue reading

The Importance of Factor Construction Choices

22.July 2022

Choosing the correct portfolio-construction techniques is very important. The new paper that is written by Amar Soebhag, Bart van Vliet, and Patrick Verwijmeren explores the various ways in which different design choices in portfolio construction can, either intentionally or unintentionally, influence and distort the statistical results of a market factor’s research. Their takeaway is that seemingly small differences in design can significantly impact the resultant portfolio’s performance.

Continue reading

Takeover Factor Explains the Size Effect

18.July 2022

The size effect assumes a negative relationship between average stock returns and firm size. In other words, it states that low capitalization stocks outperform stocks with large capitalization. Although generally accepted, the size effect keeps being challenged. Researchers have been asking how important the firm size characteristic actually is, and whether it is possible to replace the traditional size factor of Fama and French asset pricing model (1993) with more accurate factor. Recently, one potential challenger has emerged – so-called takeover factor, employed by Easterwood et al. (2022). In their study, they work on the assumption that small firms are often targets of takeovers, which gives us a different perspective on merger and acquisition news in regards to size effect. Their results show that M&A component of average returns explains the size premium entirely.

Continue reading

The Worst One-Day Shocks and The Biggest Geopolitical Events of the Past Century

11.July 2022

We dedicated several articles to how we created 100-year history for bonds, stocks, and commodities . Now we analyze the 50 worst one-day shocks and the following days in each of the abovementioned asset classes. In addition to that, we also look at how the multi-asset trend-following strategy performed during the same periods. Further, the second part of this article focuses on critical geopolitical events (the starts of major wars, international crises, and deterioration of US presidents’ health) and their effect on bonds, stocks, commodities, and the multi-asset trend-following strategy.

Continue reading

Subscribe for Newsletter

Be first to know, when we publish new content

    The Encyclopedia of Quantitative Trading Strategies

    Log in