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
Date Written: May 28, 2018
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: Suggested Citation