Factor Investing Strategies Applied to Corporate Bond ETF Constituents

This paper appliesthe techniqueof factor investing to the US corporate bond market. The researchutilizesdata from December 2014 until July 2019, obtained from investment grade and high yield ETFs constituents,andwestudy the effects of five different factors: size, low risk, value, momentum and liquidity. CAPM and 5 Factor Fama-French, adjusted to fixed income markets, are employed in order to calculate alphas for long-short and long-only single factor and multi-factor portfolios.For investment grade bonds,sizealphameasuresbetween 0.64% and 0.80%, value alpha amounts to0.71%, momentum alpharangesbetween 7.60% and 19.62%. For high yield bonds, size alpha assumes values around 11%, value alpha between 11.93% and 18,22%, momentum alpha between 4.80% and 18.22% and liquidity alpha around 2.50%.We do notdetectany statistically significant alpha for low risk. Low correlationis observedamong all of the factors, which translates into multi-factor portfolios that achieve better risk-adjusted returns. Finally, the studydiscoversthat even though long-short factor portfolios lead to higher excess returns, long-only factor portfolios bring more consistent outperformance against the benchmark.