Choosing the right factor at the right time

Choosing the right factor at the right time

The innovative iQ-FOXX Factor Indices open up a new dimension of factor investing. By switching from “biased” factors depending on the economic phase, a clear outperformance is possible.

Certain factor investments outperform the market in different economic phases. Some factors outperform the market during an economic upswing. In difficult phases, however, often opposing factors are advantageous. The new indices developed by iQ-FOXX use the more advantageous factor depending on the economic situation. The switch is rule-based and takes place between two biased factors. The result of the iQ-FOXX Factor Indices is a clear outperformance of the market with simultaneously lower volatility and thus an overall higher Sharpe Ratio.

Higher yield – lower volatility – higher Sharpe Ratio:

The results clearly show the advantage of the iQ-FOXX Factor Switch indices. iQ-FOXX uses a quantitative model to determine the switch between quality and value. Risk-On and Risk-Off signals control the allocation according to the iQ-FOXX method. Interest rate and commodity data as well as the general profit development flow into the decision-making process. Similar data is included in the model for the switch between developed and emerging markets, but currencies play a greater role here than, for example, interest rate developments. The reason for this is that emerging markets usually perform better when the dollar tends to weaken.

Compared to the World Equity Index with a return of +6.2% p.a., the iQ-FOXX DM / EM Switch Index outperformed the World Equity Index with a return of +11.5% p.a. – with a Sharpe Ratio of 0.97.

Chart sources: iQ-FOXX, Bloomberg. Period 01/2005 – 10/2018

No consultation: This information is for informational and illustrative purposes only and constitutes neither an individual investment recommendation nor an offer to buy or sell securities or other financial instruments. This report does not replace individual investor and investment advice. The information has been carefully compiled. However, no guarantee can be given for the accuracy and completeness of the information.