Smart Beta Made Smart: Synthetic Risk Factors for Institutional and Retail Investors
69 Pages Posted: 24 Sep 2020 Last revised: 8 Mar 2021
Date Written: March 7, 2021
We construct synthetic, tradable risk factors using optimal combinations of large and liquid mutual funds and ETFs. We find that investors are not able to harvest the unconditional factor risk premia, although the synthetic portfolios of institutional investors outperform those of retail investors. We also propose a methodology to identify market funds. Lastly, we show that (i) daily flows to naive smart beta strategies are more predictable than those to our synthetic strategies, and (ii) our synthetic HML outperforms a naive one based on fund names. Our results have implications for the evaluations of portfolio managers and cross-sectional return anomalies.
Keywords: Smart beta, factor investing, tradable risk premia, daily flows to smart beta strategies
JEL Classification: G11, G12
Suggested Citation: Suggested Citation