Do Smart Beta ETFs Capture Factor Premiums? A Bayesian Perspective

IÉSEG WORKING PAPER SERIES 2018-ACF-04

41 Pages Posted: 12 Jun 2018 Last revised: 23 Jan 2019

See all articles by Alexandre Rubesam

Alexandre Rubesam

IESEG School of Management; French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221

Soosung Hwang

Sungkyunkwan University - Department of Economics

Date Written: May 28, 2018

Abstract

We investigate the factor exposure of smart beta ETFs under model uncertainty using Bayesian variable selection. We find that smart beta ETFs have exposures to several factors, including size, value, momentum, quality, volatility (or low beta), and dividend yield. The average return contribution of these factors to smart beta ETFs is economically small, at 0.05% per month, but there is significant variation across individual ETFs. Given the large variability of exposures to these factors, investors who wish to implement factor investing through smart beta ETFs need to be smart regarding which ETFs to choose.

Keywords: Smart Beta, Strategic Beta, Factor Investing, Factor Selection, Bayesian Variable Selection

JEL Classification: G11, G12, C3

Suggested Citation

Rubesam, Alexandre and Hwang, Soosung, Do Smart Beta ETFs Capture Factor Premiums? A Bayesian Perspective (May 28, 2018). IÉSEG WORKING PAPER SERIES 2018-ACF-04. Available at SSRN: https://ssrn.com/abstract=3186080 or http://dx.doi.org/10.2139/ssrn.3186080

Alexandre Rubesam (Contact Author)

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

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