Abstract

http://ssrn.com/abstract=2594941
 


 



How Smart are 'Smart Beta' ETFs? Analysis of Relative Performance and Factor Exposure


Denys Glushkov


University of Pennsylvania - The Wharton School, Wharton Research Data Services (WRDS); Acadian Asset Management LLC

September 22, 2015


Abstract:     
Using a comprehensive sample of 164 domestic equity Smart Beta (SB) ETFs during 2003-2014 period, I analyze whether these funds beat their benchmarks by tilting their portfolios to well-known factors such as size, value, momentum, quality, beta and volatility. I then test if Smart Beta funds harvest factor premiums more efficiently than their traditional cap-weighted benchmarks by periodic trading against price movements.

While 60% of SB fund categories have beaten their raw passive benchmarks, I find no conclusive empirical evidence to support the hypothesis that SB ETFs outperform their risk-adjusted benchmarks over the studied period. Performance of SB funds is also insignificant when compared with the risk-adjusted blended benchmark that uses existing cap-weighted funds to provide low-cost passive exposure to market, size and value factors. SB ETFs exhibit potentially unintended factor tilts which may work to offset the return advantage from intended factor tilts. After decomposing total allocation component of SB funds into static and dynamic effects, I find that the benefit from dynamic factor allocation is neutral at best. This is consistent with the hypothesis that static factor exposure rather systematic rule-based rebalancing is the main driver of SB ETFs performance.

Number of Pages in PDF File: 53

Keywords: Smart Beta, Alternative Beta, Advanced Beta, Strategic Beta, Scientific Beta, Exotic beta, ETFs, Enhanced Indexes, Dynamic Factor, Factor Investing, Factor Allocation, Risk-Premium

JEL Classification: G11, G12, G14


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Date posted: April 17, 2015 ; Last revised: October 2, 2015

Suggested Citation

Glushkov, Denys, How Smart are 'Smart Beta' ETFs? Analysis of Relative Performance and Factor Exposure (September 22, 2015). Available at SSRN: http://ssrn.com/abstract=2594941 or http://dx.doi.org/10.2139/ssrn.2594941

Contact Information

Denys Glushkov (Contact Author)
University of Pennsylvania - The Wharton School, Wharton Research Data Services (WRDS) ( email )
WRDS, St. Leonard's Court
3819 Chestnut St, suite 300
Philadelphia, PA 19104
United States
2158986705 (Phone)
HOME PAGE: http://ssrn.com/author=664253
Acadian Asset Management LLC ( email )
260 Franklin Street
Boston, MA 02110
United States
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