Building Fund of Funds Portfolios from Index and Quantitative Funds
Summary
This overview proposes constructing fund of funds portfolios from four groups: broad-market index ETFs, sector ETFs, index-enhanced funds, and quantitative funds. It compares passive index funds, enhanced products, and quantitative funds by their typical fee and subscription characteristics, and frames diversification across asset, sector, size, and other style exposures as the core portfolio design problem. The intended universe is long-only public funds rather than absolute-return or hedged products.
The proposed methods differ by fund type. Broad index ETFs use a modified Markowitz approach with flexible rebalancing; sector ETFs use principal component analysis to reduce cross-sector correlation before risk-parity weighting. Enhanced funds are selected for liquidity, stable style, and persistent excess returns, while quantitative funds are screened for stable and distinct factor exposures. The supplied material is an abstract and does not include portfolio weights, implementation details, or empirical performance results. Its conclusions should therefore be treated as a design outline, not validation that these screens or allocations will work out of sample.
Key ideas
- The framework builds long-only fund portfolios from broad index ETFs, sector ETFs, enhanced funds, and quantitative funds.
- It treats diversification across market, sector, size, and style exposures as central to portfolio construction.
- Broad index ETFs are assigned a modified Markowitz allocation with flexible rebalancing.
- Sector ETFs are allocated using PCA to reduce correlation followed by risk-parity weighting.
- Fund selection emphasizes liquidity, stable style, excess returns, and distinct factor exposures, but the supplied abstract reports no performance evidence.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.