Can anyone clarify which factors are major and which are minor for bond indexes (ie, which factors are the minor ones that you can tweak for enhanced indexing)? I’m pretty sure these are the factors: Major: 1) Duration 2) Key rate duration and present value distribution of cash flows 3) Sector and quality percent 4) Sector duration contribution 5) Quality spread duration contribution 6) Sector/coupon/maturity cell weights 7) Issuer exposure: Exposure to specific companies, that have event risk (such as the company going bankrupt) Minor: 1) Issue selection enhancements 2) Yield curve positioning 3) Sector and quality positioning 4) Call exposure positioning I got these from pages 328-331 on Book 3 on the notes, but I may be looking in the wrong section. Thanks.
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My 2 cent, I think they are all important factors for bond indexing. I guess I am not sure what you are asking? Which factors are more important??
In enhanced indexing, you match all the major factors, but can have minor factor mismatches. So in this sense which factors are considered major and which are considered minor? Thoughts? Thanks.
Duration, Sector (MBS/ABS/RMBS/CLO…), Quality are major i would say, The rest are minor
^Hahah, then I would argue that credit rating, liquidity, YC position are important…the rest are minor 
are you guys sure you have minor and major factors? I think all of them are equally important, and what you can have is major or minor mismatches… what do you think? thx
^I agree.
In the first Schweser practice exam there is a question about mismatches and it states that any duration mismatch is a large mismatch and not allowed for enhanced indexing, but mismatching other factors such as quality and sector is ok for enhanced indexing.
Interest rate risk is the greatest risk to a portfolio, hence Durationa nd Convexity bets are Major factors that should not be altered for Enhanced Indexing…If it was full blown active mgmt then that would be a different story. For Enhanced you are just trying to tweak the portfolio holdings trying to identify undervalued holdings and hold them and not hold overvalued holdings that are in the index.
So will Duration, Sector (MBS/ABS/RMBS/CLO…), Quality are major i would say, The rest are minor Do you agree with me?
Off the top of my head not totally sure, but I would definitely say Durations Yes for Major…Quality Yes and Sector Yes.