Strategies · Library · ETFs
§4.2Factor
Alpha rotation
Rank ETFs by their alpha, the part of their return left over after a regression on market, size and value factors, instead of raw return. The idea is that skill-like excess return persists a bit.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- ETFs
- Held for
- Months
- Data
- ARCANE has part of the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Intercept from a one-year regression of ETF returns on three equity factor returns
- Entry and exit
- Buy the highest-alpha ETFs, hold and re-rank periodically.
- Sizing
- Equal across selected ETFs
How it fails
- Alpha estimates are noisy
- Needs factor data
- Persistence is weak
Data it needs
- daily adjusted closes
- additional inputs ARCANE lacks
ETF prices are available; the factor return series are not stored by ARCANE.
How ARCANE uses it
Alpha could use a raw-return or market-relative return rank as a rough stand-in (paper only).
Builds as a long-only proxy. No regression block; approximate with return relative to SPY over a window via momentum rotation.
Filed under the factor card
Own companies that are small, cheap, profitable and invest conservatively, against their opposites, and rebalance once a year.
A paper plan from this card holds 63 to 365 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §4.2, p. 64 of the SSRN version. Described in our words. Factor is ARCANE’s filing, not the book’s.