Active vs. Smart Beta ETFs: Two Sides of Active Management

Kumar, Rajnish. "Active vs. Smart Beta ETFs: Two Sides of Active Management." The Journal of Index Investing (2021).

Posted: 9 Apr 2021

See all articles by Dr. Rajnish Kumar

Dr. Rajnish Kumar

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: November 15, 2020

Abstract

This article examines the characteristics and performance of active and smart beta equity exchange traded funds (ETFs) listed in the United States since 2000. Using a sample of 95 active equity ETFs and 376 smart beta equity ETFs, the author found that as of October 30, 2020, only 20% of active equity ETFs and 15% of smart beta equity ETFs performed better (in regard to return) than the S&P500 index (market) during the past five-year period. Using Fama–French–Carhart six-factor return attribution analysis, the author finds that more than 20% of smart beta equity ETFs and 10% of active equity ETFs have significant alpha at the 10% level of confidence after controlling for all Fama–French–Carhart factor returns. The excess market return factor is significant in all variants of return attribution analysis. All return attribution analyses reveal that the value investment category and the small-cap size category of both active and smart beta equity ETFs have 100% exposure to respective factor returns. There is significant scope for active and smart beta equity ETF fund managers to enhance the security selection process and create a better factor tilting strategy, respectively.

Keywords: Exchange-traded funds and applications, factor-based models, statistical methods, performance measurement

Suggested Citation

Kumar, Rajnish, Active vs. Smart Beta ETFs: Two Sides of Active Management (November 15, 2020). Kumar, Rajnish. "Active vs. Smart Beta ETFs: Two Sides of Active Management." The Journal of Index Investing (2021)., Available at SSRN: https://ssrn.com/abstract=3822098

Rajnish Kumar (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

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