Smart Beta Made Smart

46 Pages Posted: 3 Jun 2020

See all articles by Andreas Johansson

Andreas Johansson

Stockholm School of Economics

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: May 5, 2020

Abstract

We construct synthetic, tradable risk factors (e.g., tradable HML and MOM) and individual factor legs (e.g., growth and value) using optimal combinations of large and liquid mutual funds and ETFs based on their holdings. We show that a large fraction of existing smart beta funds are simply market funds, and that both retail and institutional investors are not able to harvest the unconditional factor risk premia, with the exception of the value premium. We conclude that the investable set of strategies available to investors may be smaller than previously thought. We also show that smart beta funds' names might not be indicative of the actual fund strategy, although daily flows to smart beta strategies suggest that naive investors tend to get exposure to smart beta strategies based on funds' names. Our analysis has several important implications, including how we evaluate portfolio managers and cross-sectional returns' anomalies.

Keywords: Smart beta, factor investing, tradable risk premia, daily flows to smart beta strategies

JEL Classification: G11, G12

Suggested Citation

Johansson, Andreas and Sabbatucci, Riccardo and Tamoni, Andrea, Smart Beta Made Smart (May 5, 2020). Available at SSRN: https://ssrn.com/abstract=3594064 or http://dx.doi.org/10.2139/ssrn.3594064

Andreas Johansson

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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