Exchange Traded Funds (ETFs) can provide investors with a low-cost, flexible, and transparent instrument to gain exposure to a number of markets and sectors; however, modeling ETFs present challenges because they are heterogeneous.  In this white paper, we explain how Barra meets this challenge by using two methods—look-through and style analysis. These approaches can generate exposures to systematic risk factors and idiosyncratic risk for over 3,500 exchange traded instruments,...

Predicting risk at short horizons requires a delicate balance between two effects. On the one hand, it is best to give more weight to recent observations, as these contain the most relevant data; on the other hand, giving too much weight to recent observations can lead to increases in sampling error. In this paper, we study how to optimally balance these two effects through appropriate model calibration. Central to this challenge is the identification of a reliable measure of risk forecasting...