How Smart Are Smart Beta Exchange-Traded Funds? Analysis of Relative Performance and Factor Exposure

27 Pages Posted: 29 Oct 2016  

Denys Glushkov

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

Date Written: April 1, 2016

Abstract

Using a sample of 164 smart beta exchange-traded funds (ETFs) during 2003–2014, I analyze whether these funds beat their benchmarks by tilting their portfolios to various factors. I also test if smart beta funds harvest factor premiums more efficiently than their traditional cap-weighted benchmarks by periodically trading against price movements. I find no conclusive evidence to support the hypothesis that smart beta ETFs outperform their benchmarks on a risk-adjusted basis. Performance of smart beta funds is also insignificant relative to the risk-adjusted blended benchmark consisting of existing cap-weighted funds that provide passive exposure to market, size, and value factors. Smart beta ETFs exhibit potentially unintended factor tilts offsetting the return advantage from intended factor tilts. Performance attribution analysis demonstrates that static factor exposure rather than systematic rebalancing is the main driver of smart beta performance.

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

Suggested Citation

Glushkov, Denys, How Smart Are Smart Beta Exchange-Traded Funds? Analysis of Relative Performance and Factor Exposure (April 1, 2016). Journal of Investment Consulting, Vol. 17, no. 1, 50-74, 2016. Available at SSRN: https://ssrn.com/abstract=2860884

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

Paper statistics

Downloads
248
Rank
102,558
Abstract Views
1,057