Do Smart Beta ETFs Capture Factor Premiums? A Bayesian Perspective

IÉSEG WORKING PAPER SERIES 2018-ACF-04

35 Pages Posted: 12 Jun 2018 Last revised: 16 Oct 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: June 20, 2019

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/low beta, and dividend yield. The average return contribution of these factors in the cross-section of smart beta ETFs is economically small and insignificant, at 0.05% per month, but there is significant variation across individual ETFs, suggesting that investors who wish to implement factor investing through smart beta ETFs should select ETFs carefully. Our results also show that the ability of smart beta ETFs to achieve factor exposures is hindered by their long-only restriction.

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 (June 20, 2019). 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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