With increasing interest in smart beta strategies in the Australian equity market, we examined the effectiveness of six well-known risk factors, size, value, low volatility, momentum, quality, and dividends, in the Australian equity market from Dec. 31, 2004, to May 29, 2020.
• Quintile analysis showed that low volatility, high momentum, and high quality delivered the most persistent absolute and risk-adjusted return spreads, but small cap and value did not generate incremental return in the Australian market.
• Among the Australian factor indices offered by S&P Dow Jones Indices (S&P DJI), the quality and momentum indices delivered the highest excess returns, while the low volatility and dividend indices had lower volatility than the S&P/ASX 200.
• Our macro regime analysis showed that most factor portfolios in Australia were sensitive to local market cycles and investor sentiment regimes.
• The distinct cyclicality of factor performance in Australia indicated its potential for implementation of active views on the local equity market.