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Enhanced indexing

Enhanced indexing strategies are designed to systematically capture the market return and, in addition, benefit from well-rewarded factor premiums.

They take the capitalization-weighted index as a starting point. Then they give slightly more weight to stocks with favorable factor characteristics and slightly less weight to stocks with unfavorable factor characteristics, using proprietary investment models. This enables both relative cost effectiveness and prevents overcrowding and arbitrage. The key performance indicator for this kind of product is the information ratio, which measures the excess returns of a portfolio relative to its benchmark.

Enhanced indexing portfolios typically deliver moderate outperformance, or at least market-like returns after costs, depending on how much portfolios are allowed to deviate from their benchmark. Portfolios with greater tracking error flexibility are more suitable for investors who aim to capture more of the factor premiums in a consistent way. Our research shows that the looser the tracking error criteria, the higher the expected returns tend to be.

Enhanced indexing also enables comprehensive ESG integration. For example, ranking methodologies based on sustainability scores can be introduced in the portfolio construction process. Meanwhile, passive investors either completely ignore ESG considerations or limit their efforts to rigid exclusion lists.

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Disclaimer

This page is intended for US prospects, clients and investors only and includes information about the capabilities, staffing and history of RIAM US and its participating affiliates, which may include information on strategies not yet available in the US. SEC regulations are applicable only to clients, prospects and investors of RIAM US. Robeco BV, Robeco HK and Robeco SH are considered a “participating affiliate” of RIAM US and some of their employees are “associated persons” of RIAM US as per relevant SEC no-action guidance. Employees identified as associated persons of RIAM US perform activities directly or indirectly related to the investment advisory services provided by RIAM US. In those situations, these individuals are deemed to be acting on behalf of IUAM, a US SEC registered investment adviser.

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