20 Pages Posted: 7 Feb 2017
Date Written: February 6, 2017
Some exchange-traded funds (ETFs) are specifically designed for harvesting factor premiums, such as the size, value, momentum and low-volatility premiums. Other ETFs, however, may implicitly go against these factors. This paper analyzes the factor exposures of US equity ETFs and finds that, indeed, for each factor there are not only funds which offer a large positive exposure, but also funds which offer a large negative exposure towards that factor. On aggregate, all factor exposures turn out to be close to zero, and plain market exposure is all that remains. This finding argues against the notion that factor premiums are rapidly being arbitraged away by ETF investors, and also against the related concern that factor strategies are becoming ‘overcrowded trades’.
Keywords: factor investing, factor premiums, smart beta, exchange-traded funds, ETFs, value, momentum, low-volatility, overcrowding, factor crowding
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation
Blitz, David, Are Exchange-Traded Funds Harvesting Factor Premiums? (February 6, 2017). Available at SSRN: https://ssrn.com/abstract=2912287