Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta ....

30
1 ©2014 MSCI Inc. All rights reserved. msci.com Factor Investing & Smart Beta Raina Oberoi VP, Index Applied Research MSCI

Transcript of Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta ....

Page 1: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

1 ©2014 MSCI Inc. All rights reserved. msci.com

Factor Investing & Smart Beta Raina Oberoi

VP, Index Applied Research

MSCI

Page 2: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

2 ©2014 MSCI Inc. All rights reserved. msci.com

Outline What is Factor Investing? Minimum Volatility Index Methodology Historical Performance and Index Characteristics Risk Premia: Combining Minimum Volatility with Other Factor Indexes MSCI Quality Mix Indexes

Page 3: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

3 ©2014 MSCI Inc. All rights reserved. msci.com

What is Factor Investing?

Page 4: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

4 ©2014 MSCI Inc. All rights reserved. msci.com

Factor investing is the investment process that aims to harvest risk premia through exposure to factors

A large body of academic research highlights that long term equity portfolio performance can be explained by systematic factors. Some factors represent exposure to systematic risk and have historically earned a long term risk premium

We currently identify six risk premia factors. They are grounded in academic research and have solid explanations as to why they have provided a premium

What is Factor Investing?

Value Low Size

Quality Momentum

Low Volatility Yield

6 KEY FACTORS

Page 5: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

5 ©2014 MSCI Inc. All rights reserved. msci.com

Yesterday’s Alpha is Today’s Beta

Portfolio Return

Sector Beta

Beta

Alpha

Factor Beta

Alpha

Country Beta

1970s 1980s 2000s

Regional Beta

Low Size Value Quality Momentum Yield Low Volatility

Page 6: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

6 ©2014 MSCI Inc. All rights reserved. msci.com

What Attracts Investors to Factor Investing?

Min Vol Quality

Risk Weighted

Momentum Equal Wtd

HDY

Value Wtd

World

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

11.00% 12.00% 13.00% 14.00% 15.00% 16.00% 17.00% 18.00% 19.00%

Annu

aliz

ed R

etur

n

Annualized Risk

Performance Characteristics (November 2001 to August2014) (Gross Total Return in USD)

* Simulated history from December 1998 to April 2008; Index was launched in April 2008.

Page 7: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

7 ©2014 MSCI Inc. All rights reserved. msci.com

What Causes Risk Premia and How Persistent Are These Effects?

There are two main views on why these excess returns exist, which result from different perspectives on market efficiency:

The important question for long term investors considering an allocation to risk premia strategies is not only which theory explains them but whether they are likely to persist

Both theories attempting to explain historical return regularities may allow for risk premia to persist, provided that the same historical behavior persists in the future

Factors are cyclical and there may be periods of prolonged underperformance

1. Systematic Risks 2. Systematic Errors

Certain stocks are highly correlated with the economic cycle and earn a risk premium

Certain stocks may be systematically under priced and subsequently earn a high return

Page 8: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

8 ©2014 MSCI Inc. All rights reserved. msci.com

The Trade-Off Between Exposure and Investability

Pure

Factors

Mkt Neutral Factor Indexes

Long Short Factor Indexes

High Exposure Factor Indexes

High Capacity Factor Indexes

Cap Weighted Parent Indexes

Exposure

Investability

MSCI Market Neutral Barra Volatility

MSCI Momentum Tilt (130/30)

MSCI Quality

MSCI Value Weighted

MSCI ACWI IMI

Page 9: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

9 ©2014 MSCI Inc. All rights reserved. msci.com

Minimum Volatility Index Methodology

Page 10: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

10 ©2014 MSCI Inc. All rights reserved. msci.com

MSCI Minimum Volatility Index Methodology

Parameter Methodology Comments

Universe Parent index constituents Derived indexes benefit from parent index construction rules

Optimization MSCI’s market leading Barra Global Equity Model (GEM2) Account for Factor volatility and correlation

Comprehensive and robust risk measures

Weighting Minimize index volatility subject to constraints Ensure high investability and liquidity

Constraints

• Stocks: Lower of 1.5% or 20x the cap-weight, with a minimum of 5bps

• Sectors:-/+5% relative to the parent index • Countries: -/+5% or 3x relative to the parent index • Style: -/+ 0.25 relative to Barra factor of the parent

index (except for Volatility) • Turnover: Maximum 10% one-way turnover per

rebalancing

Stock weight cap ensures adequate capacity and replicability

Style and Sector caps ensure no unintended exposure

Turnover limit ensures lower cost replication

Number of Constituents

Subset of parent index, number will vary High level of diversification achieved by a subset of parent index

Rebalancing Semi-annual (May and November) Timely data updates, consistent with MSCI rebalancing calendar

Page 11: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

11 ©2014 MSCI Inc. All rights reserved. msci.com

Historical Performance and Characteristics

Page 12: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

12 ©2014 MSCI Inc. All rights reserved. msci.com

Relative Performance of the MSCI World Minimum Volatility Index*

Crisis periods are typically characterized by spikes in market volatility The MSCI World

Minimum Volatility Index has historically outperformed the MSCI World Index across the periods of market crisis

MSCI World Minimum Volatility (USD) Relative Performance

* Simulated history from December 1988 to April 2008 and the Index was launched in April 2008.

Period: May 1988 – August 2014

US Savings and Loan Crisis

Tech Burst Sub Prime Crisis

Eurozone Crisis

80

90

100

110

120

130

140

150

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Cum

ulat

ive

outp

erfo

rman

ce

Page 13: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

13 ©2014 MSCI Inc. All rights reserved. msci.com

Historical Performance from December 1998 to August 2014

* Simulated history from December 1998 to April 2008; Index was launched in April 2008.

Historical Gross Total Returns, USD MSCI World MSCI World Minimum Volatility

Annualized Return (%) 5.1 6.6

Annualized Risk (%) 15.8 11.1

Return/Risk 0.32 0.59

Sharpe Ratio 0.17 0.38

Tracking error (%) 0.0 7.7

Correlation 1.0 0.90

Historical Beta 1.00 0.63

Information Ratio NA 0.20

Max Drawdown (%) 57.5 47.7

Avg. Annual Turnover (%) 3.2 20

Price to Book 2.2 2.5

Price to Earnings 18.6 18.7

Div. Yield (%) 2.3 2.6

December 1998 - August 2014

Page 14: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

14 ©2014 MSCI Inc. All rights reserved. msci.com

Active Style Factor and GICS Sector Exposures

Historically, the MSCI World Minimum Volatility Index has substantially lower active exposure to Volatility

The MSCI World Minimum Volatility Index over-weighted defensive sectors such as Utilities , Consumer Staples and Health Care while underweighting cyclical sectors such as Materials, Financials and Information Technology

From December 1998 to August 2014 using Barra GEM2 based on simulated history from December 1998 to April 2008 and the Index was launched in April 2008.

Page 15: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

15 ©2014 MSCI Inc. All rights reserved. msci.com

Minimum Volatility Indexes Across Regions in the Past 10 Years

Historically, the MSCI Minimum Volatility Indexes demonstrated around 21 – 33 % reduction in risk, across regions, during the observed period

The most effective risk reduction was in the ACWI Index and the World Index

Historical Gross Total Returns, USD

MSCI ACWI

MSCI ACWI Minimum Volatility

MSCI World MSCI World Minimum Volatility

MSCI EM MSCI EM Minimum Volatility

MSCI USA MSCI USA Minimum Volatility

MSCI Europe

MSCI Europe Minimum Volatility

Total Return* (%) 8.4 10.2 8.2 8.9 12.9 16.2 8.6 9.5 8.0 10.0

Total Risk* (%) 16.5 11.1 16.0 11.6 23.7 19.0 14.7 11.3 19.9 16.0

Risk Adjusted Return 0.5 0.9 0.5 0.8 0.5 0.9 0.6 0.8 0.4 0.6

Active Return* (%) 0.0 1.8 0.0 0.7 0.0 3.3 0.0 1.0 0.0 2.0

Tracking Error* (%) 0.0 7.5 0.0 7.0 0.0 6.2 0.0 5.8 0.0 5.7

Information Ratio NA 0.2 NA 0.1 NA 0.5 NA 0.2 NA 0.4

Historical Beta 1.00 0.62 1.00 0.67 1.00 0.79 1.00 0.72 1.00 0.78

Risk Reduction (%) NA 32.6 NA 27.4 NA 19.7 NA 23.2 NA 19.9

* Annualised from August 2004 to August 2014

Page 16: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

16 ©2014 MSCI Inc. All rights reserved. msci.com

Risk Premia: Combining Minimum Volatility and Other Factor Indexes

Page 17: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

17 ©2014 MSCI Inc. All rights reserved. msci.com

Is there a Free Lunch?

50

70

90

110

130

150

170

190

MSCI World Equal Weighted/MSCI World MSCI World Quality/MSCI World MSCI World Min Vol/MSCI WorldMSCI World Risk Weighted/MSCI World MSCI World Value Weighted/MSCI World MSCI World HDY/MSCI World

Relative performance of MSCI World Factor Indexes

Page 18: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

18 ©2014 MSCI Inc. All rights reserved. msci.com

Deploying Multi-Factor Indexes Global Equity Beta Added Value

Strategic Factor Tilts

Passive Investing Factor Investing Active Management

Benchmark Indices Multi-Factor Index Active Mandates

ESG Beliefs & Constraints

Tactical Factor Tilts & Overlay Strategies

ACWI IMITactical Asset Allocation

Security Selection Market TimingVa

lue

Size

Yiel

d

Qua

lity

Vola

tility

Mom

entu

m

Page 19: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

19 ©2014 MSCI Inc. All rights reserved. msci.com

Considerations for Combining Factor Indexes

Factor Risk Correlation Business Cycle

Value Comparable to market Low with Momentum and Quality

Pro-cyclical

Momentum Comparable to market Low with Value, Yield, and Quality

Pro-cyclical

Low Size Higher than market Low with Min Volatility, Yield, and Quality

Pro-cyclical

Quality Lower than market Low with Value, Size, Yield and Momentum

Defensive

Low Volatility Lower than market Low with Value and Momentum Defensive

Yield Lower than market Low with Size, Quality and Momentum

Defensive

Page 20: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

20 ©2014 MSCI Inc. All rights reserved. msci.com

Value and Volatility Experienced Different Performance Cycles

MSCI World Minimum Volatility (USD) and MSCI World Value Weighted Relative Performance

Period: October 2002 – August 2014

90

100

110

120

90

100

110

120

2002 2004 2006 2008 2010 2012

Cum

ulat

ive

Out

perf

orm

ance

MSCI World Minimum Volatility / MSCI World MSCI World Value Weighted / MSCI World

Value outperformance, Minimum Volatility underperformance

Minimum Volatility performed defensively, Value

performed cyclically

Page 21: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

21 ©2014 MSCI Inc. All rights reserved. msci.com

Combined Factor Index Strategy Achieved Superior IR in the Past 10 Years

Historical Performance* Gross Total Return, USD MSCI World Index MSCI World Minimum

Volatility (USD) Index MSCI World Value

Weighted Combined 50/50

Total Return** (%) 7.4 7.8 7.0 7.6

Total Risk** (%) 16.2 11.7 17.7 14.3

Risk Adjusted Return 0.46 0.67 0.40 0.53

Active Return** (%) 0.0 0.4 -0.3 0.2

Tracking Error** (%) 0.0 7.2 2.7 3.3

Information Ratio NaN 0.06 -0.12 0.05

One-Way Turnover** 2.5 20 15.6 21.9

Transaction Cost (bps) 50 50 50 50

Impact on Return ** -0.01 -0.10 -0.08 -0.11

Max Drawdown (%) 57.5 47.7 61.6 54.9

1-Month 95% VaR (%) -8.6 -5.7 -9.8 -7.7

Historical Beta 1.00 0.66 1.09 0.87

* Simulated history : MSCI World Minimum Volatility (USD) from Nov 2004 to Apr 2008 and MSCI World Value Weighted from Nov 2004 to Nov 2010

* August 2004 to August 2014 ** Annualised in %

Historical Analysis November 2004 to August 2014 MSCI World Index MSCI World Minimum

Volatility (USD) Index MSCI World Value Weighted Separate 50/50 Combined 50/50

Annual One-way Turnover (%) 2.5 20.0 15.6 24.8 21.9

Transaction Cost (%) 0.50 0.50 0.50 0.50 0.50

Annual Impact on Return (%) -0.01 -0.10 -0.08 -0.12 -0.11

Page 22: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

22 ©2014 MSCI Inc. All rights reserved. msci.com

MSCI Quality Mix Indexes

Page 23: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

23 ©2014 MSCI Inc. All rights reserved. msci.com

MSCI Quality Mix Indexes Equal weighted combination of the MSCI Value Weighted, Minimum Volatility and

Quality Indexes

MSCI Quality MIX

MSCI Value Weighted Index

• Re weights parent index according to four fundamental variables: Sales, Earnings, Cash Flow, Book Value

• Semi-annual rebalancing

MSCI Quality Index

• Identifies quality growth stocks within parent index by calculating a quality score based on: high return on equity, stable earnings growth and low leverage

• Semi-annual rebalancing

MSCI Minimum Volatility Index

• Identifies stocks from the parent index with the potential to provide lowest total risk and superior risk-adjusted performance

• Constructed using minimum variance optimization

• Semi-annual rebalancing

Page 24: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

24 ©2014 MSCI Inc. All rights reserved. msci.com

Quality, Value and Volatility Have Different Performance Cycles

MSCI World Quality, MSCI Minimum Volatility (USD) and MSCI Value Weighted Relative Performance

Performance through April 2014

During the long bull-run, Value Weighted outperformed, Minimum Volatility tracked the benchmark and Quality lagged

Both Minimum Volatility and Quality outperformed during the recent crisis, Value Weighted performed cyclically

Page 25: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

25 ©2014 MSCI Inc. All rights reserved. msci.com

80

100

120

140

160

180

200

1988 1991 1993 1995 1997 2000 2002 2004 2006 2009 2011 2013

Cum

ulativ

e out

perfo

rman

ce

US Savings & Loans

Tech

Global Financial

CrisisSub Prime

Relative Performance of the MSCI Quality Mix Indexes

Simulated history from May 1988 to February 2014.

MSCI World Quality Mix Index Relative Performance

MSCI World Quality Mix Index has historically outperformed MSCI World

Combining the 3 Factor Indexes diversified returns during periods of volatility

Page 26: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

26 ©2014 MSCI Inc. All rights reserved. msci.com

MSCI World Historical Performance from 1998 to 2014

Simulated history from Dec 1998 to April 2014.

Page 27: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

27 ©2014 MSCI Inc. All rights reserved. msci.com

Questions?

Page 28: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

28 ©2014 MSCI Inc. All rights reserved. msci.com

MSCI 24 Hour Global Client Service

Asia Pacific China North 10800.852.1032 (toll free)

China South 10800.152.1032 (toll free)

Hong Kong +852.2844.9333

Seoul 00798.8521.3392 (toll free)

Singapore 800.852.3749 (toll free)

Sydney +61.2.9033.9333

Taiwan 008.0112.7513 (toll free)

Tokyo +81.3.5226.8222

Europe, Middle East & Africa

Cape Town +27.21.673.0100

Frankfurt +49.69.133.859.00

Geneva +41.22.817.9777

London +44.20.7618.2222

Milan +39.02.5849.0415

Paris 0800.91.59.17 (toll free)

Americas

Americas 1.888.588.4567 (toll free)

Atlanta +1.404.551.3212

Boston +1.617.532.0920

Chicago +1.312.706.4999

Monterrey +52.81.1253.4020

New York +1.212.804.3901

San Francisco +1.415.836.8800

São Paulo +55.11.3706.1360

Toronto +1.416.628.1007

[email protected] | www.msci.com

Page 29: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

29 ©2014 MSCI Inc. All rights reserved. msci.com

Notice and Disclaimer This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of MSCI Inc. or its subsidiaries (collectively, “MSCI”), or MSCI’s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the “Information Providers”) and is provided for informational purposes only. The Information may not be modified, reverse-engineered, reproduced or redisseminated in whole or in part without prior written permission from MSCI. The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information may not be used to create indexes, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services. The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF THE INFORMATION PROVIDERS MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH INFORMATION PROVIDER EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury results from the negligence or willful default of itself, its servants, agents or sub-contractors. Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results. The Information should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. All Information is impersonal and not tailored to the needs of any person, entity or group of persons. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy. It is not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index. MSCI does not issue, sponsor, endorse, market, offer, review or otherwise express any opinion regarding any fund, ETF, derivative or other security, investment, financial product or trading strategy that is based on, linked to or seeks to provide an investment return related to the performance of any MSCI index (collectively, “Index Linked Investments”). MSCI makes no assurance that any Index Linked Investments will accurately track index performance or provide positive investment returns. MSCI Inc. is not an investment adviser or fiduciary and MSCI makes no representation regarding the advisability of investing in any Index Linked Investments.

Page 30: Factor Investing & Smart Beta - ETF.com: Find the Right ETF · Factor Investing & Smart Beta . Raina Oberoi ... Yesterday’s Alpha is Today’s Beta . Portfolio . Return . Sector

30 ©2014 MSCI Inc. All rights reserved. msci.com

Notice and Disclaimer (continued) Index returns do not represent the results of actual trading of investible assets/securities. MSCI maintains and calculates indices, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the index or Index Linked Investments. The imposition of these fees and charges would cause the performance of an Index Linked Investment to be different than the MSCI index performance. The Information may contain back tested data. Back-tested performance is not actual performance, but is hypothetical. There are frequently material differences between back tested performance results and actual results subsequently achieved by any investment strategy. Constituents of MSCI equity indexes are listed companies, which are included in or excluded from the indexes according to the application of the relevant index methodologies. Accordingly, constituents in MSCI equity indexes may include MSCI Inc., clients of MSCI or suppliers to MSCI. Inclusion of a security within an MSCI index is not a recommendation by MSCI to buy, sell, or hold such security, nor is it considered to be investment advice. Data and information produced by various affiliates of MSCI Inc., including MSCI ESG Research Inc. and Barra LLC, may be used in calculating certain MSCI equity indexes. More information can be found in the relevant standard equity index methodologies on www.msci.com. MSCI receives compensation in connection with licensing its indices to third parties. MSCI Inc.’s revenue includes fees based on assets in investment products linked to MSCI equity indexes. Information can be found in MSCI’s company filings on the Investor Relations section of www.msci.com. MSCI ESG Research Inc. is a Registered Investment Adviser under the Investment Advisers Act of 1940 and a subsidiary of MSCI Inc. Except with respect to any applicable products or services from MSCI ESG Research, neither MSCI nor any of its products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and neither MSCI nor any of its products or services is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Issuers mentioned or included in any MSCI ESG Research materials may include MSCI Inc., clients of MSCI or suppliers to MSCI, and may also purchase research or other products or services from MSCI ESG Research. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, IPD, FEA, InvestorForce, and other MSCI brands and product names are the trademarks, service marks, or registered trademarks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor’s. “Global Industry Classification Standard (GICS)” is a service mark of MSCI and Standard & Poor’s. © 2014 MSCI Inc. All rights reserved.