Hi Ming, thanks for your questions. The following responses:
1) The index itself was not levered, but simply selected stocks with high debt-over-equity ratios, in addition to these being small and cheap. We used the sequential model for the stock selection.
2) We defined the universe as all US stocks above $500 million market cap and selected the 30% smallest companies of that universe.
3) There are mutual funds that replicate this strategy (small, cheap & levered) and smart beta ETFs that focus on small and cheap stocks. Including leverage as a factor is somewhat marginal.
On an unrelated note, adding a factor like high cashflow stability, which many PE target companies feature, and then leveraging the index would be an interesting follow on analysis.
Hi Ming, thanks for your questions. The following responses:
1) The index itself was not levered, but simply selected stocks with high debt-over-equity ratios, in addition to these being small and cheap. We used the sequential model for the stock selection.
2) We defined the universe as all US stocks above $500 million market cap and selected the 30% smallest companies of that universe.
3) There are mutual funds that replicate this strategy (small, cheap & levered) and smart beta ETFs that focus on small and cheap stocks. Including leverage as a factor is somewhat marginal.
On an unrelated note, adding a factor like high cashflow stability, which many PE target companies feature, and then leveraging the index would be an interesting follow on analysis.