How Can 'Smart Beta' Go Horribly Wrong?

21 Pages Posted: 22 Sep 2017

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Noah Beck

Research Affiliates, LLC

Vitali Kalesnik

Research Affiliates LLC

John West

Research Affiliates

Date Written: February 1, 2016

Abstract

Factor returns, net of changes in valuation levels, are much lower than recent performance suggests. Value-add can be structural, and thus reliably repeatable, or situational—a product of rising valuations—likely neither sustainable nor repeatable. Many investors are performance chasers who in pushing prices higher create valuation levels that inflate past performance, reduce potential future performance, and amplify the risk of mean reversion to historical valuation norms. We foresee the reasonable probability of a smart beta crash as a consequence of the soaring popularity of factor-tilt strategies.

Keywords: smart beta, factor returns

JEL Classification: G10

Suggested Citation

Arnott, Robert D. and Beck, Noah and Kalesnik, Vitali and West, John, How Can 'Smart Beta' Go Horribly Wrong? (February 1, 2016). Available at SSRN: https://ssrn.com/abstract=3040949 or http://dx.doi.org/10.2139/ssrn.3040949

Robert D. Arnott

Research Affiliates, LLC ( email )

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Noah Beck

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Vitali Kalesnik (Contact Author)

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

John West

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
949-325-8786 (Phone)

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