Study finds holes in quality factor indexes

Metrics commonly used to build indexes bring zero alpha, says Research Affiliates

Dollars down a black hole
Investing in indexes constructed using certain metrics ‘a waste of capital’

It has been one of the more popular and better-performing factor investments in recent years but, according to a new analysis, many strategies based on buying quality stocks are statistically flaky.  

The study by factor-investing firm Research Affiliates suggests three of the most common groups of metrics used to pick stocks going into quality factor indexes – leverage, earnings stability and earnings growth – deliver little, if any, alpha.

Indexing firms and asset managers should use only

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