Factors: Shorting Stocks vs the Index

Do Short Stock Positions Contribute to Factor Returns?

July 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Most factor investing research is based on long-short stock portfolios
  • Investible risk premia strategies often feature a short index position
  • Trade-off between theoretical alpha and implementation costs & efficiency


Amundi, a French asset manager, was the first institution to launch a European multi-factor ETF that was market neutral, the Amundi ETF iSTOXX Europe Multi-Factor Market Neutral UCITS ETF (MKTN:FP). MKTN harvests factor returns from European equities and achieves market-neutrality by buying exchange-traded factor futures while shorting the Stoxx Europe 600 index future. This portfolio construction not only differs from competing funds, but also from academic research, which created the foundation of factor investing. This article investigates the difference between constructing a factor portfolio by shorting stocks on the one hand, and constructing a factor portfolio that shorts an index on the other. It proceeds as follows. First, it outlines the key differences between shorting stocks versus an index. Second, it analyses the impact of replacing stocks with the index for one factor in detail, specifically the value factor in the US. Finally, it highlights the impact for various factors in the US, Europe and Japan.


Factor investing has its origin in the work of Fama and French (1993) who explained stock returns by the market risk and the value and size factors. In academic research factor portfolios are created by ranking the top and bottom stocks of a stock market by a factor and then rebalancing these on a regular basis. Nearly all academic research is based on selecting single stocks for the long and short portfolios and indices are rarely featured.

However, when undertaking fund management in practice, shorting a portfolio of stocks is much more complex and expensive than shorting an index. In order to short stocks, stocks first must be available for shorting, which requires confirmation from a broker as naked shorting is banned in most countries. Shorting an index can be done efficiently via futures or ETFs, which requires little up-front work and portfolio maintenance thereafter, aside from occasionally rolling the future forward at expiry and adjusting the trade size. The transaction and im