Indexes

The AlphaDEX® Methodology: A Dynamic Approach to Investing

This series is republished with permission from Market Realist. Editor Peter Barnes of Market Realist interviews two Nasdaq Global Information Services leaders: Dave Gedeon, Head of Research and Product Development, Nasdaq Global Information Services and Tom Dorsey, Founder of Dorsey, Wright & Associates, a Nasdaq Company.

PART 9 OF 18


Market Realist: How do you normalize these factors between sectors?

Dave: Good question. Depending on the sector, financials as an example, we will utilize a different factor, especially on the value side, just to make sure we have an apples-to-apples comparison. We’ll always ensure that sectors won’t get over-weighted. On our US family, we have sector constraints, so that way we look at the parent market-weighted benchmark, and then a sector cannot go too high above the ranking or weight that it has within that benchmark within the AlphaDEX selection. We control for that type of slide to limit bias in terms of over- or under-including a particular sector.

Market Realist: So you normalize within the sectors, and then you have predetermined weights of what your exposure will be per sector.

Dave: We have constraints on what that sector exposure would be. An example would be in the US. Let’s say tech is approximately 20% of the broad benchmark. With AlphaDEX, we wouldn’t go above 35% for tech stocks. So if tech came in at 25%, slightly overweight to the benchmark, we would allow that to carry forward.

Market Realist: These constraints are fully according to new information, I assume?

Dave: We have historically used a threshold of 15% above the benchmark, and I would not say that we have any plans around changing that.

Market Realist: How frequently do these products rebalance? Does that vary across the products?

Dave: It does vary. We update quarterly on the US side. What I mean by that is the methodology is applied to the universe each quarter. And then it goes effective a few business days after that. In other areas, in terms of regions, like countries, when we look outside of the US, we do it on a semi-annual basis. Part of that is because we’re using fundamental data. US companies report on a quarterly basis and the international names tend to report on a semi-annual or annual basis.

Market Realist: What do you think is the most important factor that will drive a particular exposure to a sector within your products? On the global side, what is the single most important factor driving how much you allocate to a particular area in the world in the AlphaDEX methodology?

Dave: Within the AlphadDEX methodology, no factor or fundamental metric is more important than any other. We take an equal-weighted approach or an average approach across the value and growth factors for each, within each name, and then we assign a value score or growth score to that particular stock. We allow the market to dictate what factors have higher or lower importance, but in our strategy, we want to make sure that we’re taking a blend of all these known factors and not utilizing one factor more than another.


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