"Enhanced index fund" is an investment strategy, combining active and passive management elements, for index tracking and return enhancing through disciplined market timing, stock selection and leverage activities. Though enhanced index funds have been well developed globally, there is only one enhanced index fund in Taiwan - "Polaris/P-Shares Taiwan Dividend+ ETF". Taiwan's stock market falls between weak form and semi-strong form efficiency. With the growth of Taiwan's mutual fund industry size, the enhanced index funds have very good chance to become the main investment instruments of institutional investors, index investors, and pensions. This study attempts to build enhanced index funds, then analyzes the performance and checks the feasibility of launching such products in Taiwan.
In this study, we select "TSEC Taiwan 50 index (TW50)" as the benchmark index. The innovative "Multi-section Adjustment Model" divides the original weights of constituent stocks into two sections. Each section is adjusted through parameters. The "multi-factor model section" is responsible for the delivery of enhanced return, while the "cash dividend yield section" is used to provide excess cash dividend yield. The investment target is set for less than 1.5 percent tracking error, at least 1 percent tracking difference, and higher cash dividend yield than the benchmark.
Building methodology can be divided into "fixed parameter model" and "floating parameters model" according to its update frequency. Empirical studies show that: (1) The enhanced index fund built from the "fixed parameter model" not only exhibits risk slightly lower than the benchmark, but also enjoys higher return. (2) In the short-term, the performance of the enhanced index fund built from "floating parameters model" is difficult to predict; in the long-term, however, the risk is lower and the return is higher than TW50. The cumulative return from the "fixed parameter model" is higher than the "floating parameters model" by about 2 percent. (3) The effectiveness of the parameters used to control the optimal weight distribution is decreasing over time, so it is necessary to update parameters regularly. (4) Raising "enhancement multiplier" will cause higher tracking error, but also bring higher tracking difference. This result proves that "multi-factor model section" works nicely and has its contribution. (5) As the "section allotment" and/or "fixed rate" getting lower, there will be more and more weights distributed to the cash dividend yield level, resulting in higher cash dividend yield. It means the "cash dividend yield section" has its merit as well. (6) Regular parameter updates to the "floating parameters model" helps to reduce the tracking error and, at the same time, maintain positive tracking difference. Considering the perpetual life of real world funds, "floating parameters model" should be a better building methodology.
"Multi-Section Adjustment Model" has following advantages: (1) Its concept is intuitive and easy to use. (2) Sections can be customized based on investment objectives. (3) It is easy to analyze the impacts and trade-off among the parameters.
| Identifer | oai:union.ndltd.org:NSYSU/oai:NSYSU:etd-0818108-035911 |
| Date | 18 August 2008 |
| Creators | Wang, Wei-Cheng |
| Contributors | Huang,Jen-Jsung, Jeng,Yih, Kuo,Hsioujen |
| Publisher | NSYSU |
| Source Sets | NSYSU Electronic Thesis and Dissertation Archive |
| Language | Cholon |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0818108-035911 |
| Rights | unrestricted, Copyright information available at source archive |
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