Active Allocation of Smart Beta Indices Based on Factor Timing and Regime Switching

There has been significant evidence on the forecasting ability of Regime switching regression models. Smart beta or alternative beta indices are gaining wide popularity among investment community. Smart beta indices constructed with either fundamental or scientific weighting schemes are proven to outperform cap-weighted portfolios in the long run. At the same time, smart beta indices have significant exposure to risk factors such as size, value, momentum and volatility. The risk factors exhibit different behaviour in different regimes. In this research we examine and present evidence of the presence of regimes in smart beta indices. We also examine the possibility of adding value to a portfolio by switching between regime dependent portfolios of smart beta indices exploiting factor exposures