Do sector ETFs follow Fama-French factors?
Author
Term
4. semester
Publication year
2024
Submitted on
2024-06-03
Pages
52
Abstract
Abstract: This thesis explores the impact of Fama-French factors on the performance of sector-specific Exchange-Traded Funds (ETFs) in the U.S. market from September 2010 to September 2019. Various asset pricing models are applied, including the CAPM, FamaFrench three-factor, Carhart four-factor, and Fama-French five- and six-factor models, to identify the most effective explanatory model. FF5M (Fama-French five-factor model with momentum) is found to provide the best fit. Based on regression coefficients from the model it is determined that certain factors significantly influence performance of specific sectors. We construct sector-specific ETF portfolios categorized by the significance of their factor exposures. These portfolios are evaluated using performance metrics such as the Sharpe ratio, Sortino ratio, Treynor ratio, Information ratio, and Omega ratio. The results offer insights into the strategic construction of sector-specific ETF portfolios for improved risk adjusted returns.
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