RESEARCH: SMART BETA

MULTI-FACTOR SMART BETA ETFS

  • Investors have leaned towards multi-factor over single-factor products in recent years
  • The factor selection and portfolio construction of multi-factor ETFs can be challenged
  • Multi-factor ETFs often feature factors, such as growth, which are not supported by academic research while lacking exposure to established ones such as quality and momentum

BENCHMARKING SMART BETA ETFS

  • Long-only factor portfolios can be used for benchmarking smart beta ETFs
  • Results highlight minor tracking errors
  • Likely explained by relatively homogenous factor definitions by ETF issuers

SMART BETA: BROKEN BY DESIGN?

  • Smart beta excess returns are different from factor returns
  • The Low Volatility factor shows the highest discrepancy between theoretical and realized returns
  • Investors might be better served by embracing long-short factor products

AN ANATOMY OF SMART BETA VALUE ETFS

  • Smart beta Value ETFs are relatively homogenous
  • Some show high exposures to other equity factors, which may represent risk
  • Excess returns from smart beta are significantly lower than long-short factor returns

ETFS, SMART BETA & FACTOR EXPOSURE

  • Factor exposure analysis can be used to derive factor themes
  • Smart beta ETFs offer relatively low factor exposure
  • It is all about how factors are defined

SMART BETA OR SMART MARKETING?

  • Smart beta ETF investors seem to ignore empirical evidence
  • Excess returns from smart beta are substantially different from factor returns
  • Smart beta ETFs offer little diversification for an equity-centric portfolio

SMART BETA & FACTOR CORRELATIONS TO THE S&P 500

  • Most smart beta products exhibit correlations of > 0.9 to the S&P 500
  • Factors show correlations of zero on average
  • However, factor correlations are highly volatile across the market cycle

SMART BETA VS FACTORS IN PORTFOLIO CONSTRUCTION

  • Investors seek smart beta products for risk reduction
  • However, smart beta products are effectively long-only products with full equity risk
  • Only factor products, i.e. long-short portfolios, offer true diversification benefits and downside protection

SMART BETA VS FACTOR RETURNS

  • Smart beta ETFs are based on factor investing research
  • Excess returns from smart beta ETFs are different from factor returns
  • Investors need to be aware that smart beta ETFs offer little diversification for an equity-centric portfolio

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