In response to the increasing interest in smart beta strategies in the Chinese equity market, we examined the effectiveness of six well-known risk factors—size, value, low volatility, momentum, quality, and dividends—in that market from July 31, 2006, to Nov. 30, 2018.
• All the risk factors delivered absolute and risk-adjusted quintile return spreads, with the low volatility, value, and high dividend portfolios generating the highest risk-adjusted return spreads.
• All the Chinese factor indices offered by S&P DJI, except the momentum index, generated absolute and risk-adjusted excess returns in the long run. The low volatility and high dividend indices delivered the highest absolute and risk-adjusted returns, while only the low volatility index had reduced return volatility and drawdown compared with the S&P China A BMI.
• S&P DJI’s various Chinese factor indices behaved differently during up and down markets. The momentum index tended to perform better in up markets, but the low volatility, value, quality, and dividend indices had better returns in down markets.
• Our macro regime analysis showed that most factor portfolios in China were sensitive to local market cycles and investor sentiment regimes.
• Factor strategies can be useful tools for the implementation of active views on the Chinese equity market due to distinct cyclicality in factor performance.