How have the Factor Indices performed since launch?

Over the past few years, NiftyIndices and S&P have launched various factor indices (Value, Momentum, Low Volatility, Quality, Alpha, or multi-factor) for Indian stocks. And the AMCs have launched various index funds on such indices cashing in on the popularity and the latent demand from the investors.

So far, so good.

When any index is launched, there is a launch date and there is a base date. Launch date is the date on which the index was launched. And the live data for the index is available after the launch date. Base date is an old date from which the index provider has provided the back-fitted data (based on strategy). For instance, NiftyIndices launched Nifty 200 Momentum 30 index on August 25, 2020 (launch date) with April 1, 2005 as the base date. Hence, live data for the index will be available only after August 25, 2020 (the launch date).

Until now, I have compared the performance of various index products against Nifty 50 or their universe of stocks since the base date. However, you would expect to select only those strategies (or those definition of strategies) that have delivered superior returns in the past. Hence, the past performance from base date (at least until the launch date) for most indices will be good.

But how have these indices performed since their launch?

Let’s find that out.

I compare performance of factor indices since their respective launch dates until today (January 25, 2024).

How does that help?

Well, while the past performance (good or bad) of any factor does not guarantee future performance (good or bad), I would clearly NOT be comfortable investing in products/factor indices that have not delivered superior performance in the past (unless I have strong conviction in that approach). Makes sense, right? Such an analysis on live data may at least tell you where not to invest.

And I think the performance since the launch date (live data) is more reliable than the performance since the base date. Yes, the live data should be available for reasonably long period. The longer, the better.

I have picked up the factor indices

1. Where the live data is available for at least 3 years (the factor indices were launched at least 3 years back) AND
2. Have an ETF or an index fund tracking those indices (Note: ETF/index fund can be less than 3 years old)

 This post is NOT to convince you to invest in factor indices. This analysis is for academic purposes only. I will just present the data and trust you to make your own assessment.

The following 9 factor indices met the eligibility criteria.

I have written about most of these indices in the past. Sharing links towards the end of this post. These posts discuss index methodology and performance comparison in detail. I have also written a post comparing the performance of various factor indices but that post is also based on back-fitted data. In this post, we focus on performance since launch.

#1 Nifty 50 Equal Weight

#2 Nifty 50 Value 20 Index

#3 Nifty 100 Quality 30 index

#4 Nifty 100 Low Volatility 30

#5 Nifty 200 Momentum 30 index

#6 Nifty 200 Quality 30 Index

#7 Nifty Midcap 150 Quality 50 index

#8 Nifty Alpha Low Volatility 30

#9 Nifty Alpha 50

Compiling the data into a single table

How do Factor indices compare against each other?

Since we are focusing on live data, we need to first find the index that was launched last.

Of all the factor indices considered, Nifty 200 Momentum 30 index was the last one to be launched.

Launched on August 25, 2020.

I compare the performance of all factor indices since that date until January 25, 2024.

Note: Please note that the stock markets have been extremely strong over the last 3 years. There are certain kind of stocks that tend to do better in bull markets. For instance, you would expect mid and small cap stocks to do well during bull markets. Hence, do not base your judgement on factor indices based on the just performance of the last 3 years. Look at longer term live data, if available.

Caveats and Points to Note

1. Past performance does not guarantee future returns.
2. Unlike market cap-based indices, these factor indices are relatively nascent. Factor ETFs and index fund are an even recent development. Not only can factor strategies go out of favour, but alpha (excess returns) can also shrink/vanish when more money chases a particular factor strategy (or due to any other reason). You must always be alive to this possibility.
3. While I have just compared the return performance, you must not base your investment decisions solely on returns performance. As an investor, you may want to look at other aspects such as risk-adjusted returns, volatility, drawdown, rolling returns as well.
4. I have compared the performance of Total Returns Index (TRI). However, you cannot invest in an index. You can invest only in an ETF or an index fund. You must check if the respective ETF or index fund has been tracking the index well. If you find the tracking difference too high, dig deeper. A high tracking difference could be because of index constitution methodology as well.
5. Each factor index will have its own unique stock weightage methodology. If an index methodology can assign a high weightage to a less liquid stock, getting in and out of the less liquid stocks (at the time of including and exclusion from index) can sometimes cause problems.