Study finds holes in quality factor indexes

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

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