Using a comprehensive sample of 164 domestic equity Smart Beta (SB) ETFs during 2003-2014 period, I analyze whether these funds beat their benchmarks by tilting their portfolios to well-known factors such as size, value, momentum, quality, beta and volatility. I then test if Smart Beta funds harvest factor premiums more efficiently than their traditional cap-weighted benchmarks by periodic trading against price movements. While 60% of SB fund categories have beaten their raw passive benchmarks, I find no conclusive empirical evidence to support the hypothesis that SB ETFs outperform their risk-adjusted benchmarks over the studied period. Performance of SB funds is also insignificant when compared with the risk-adjusted blended benchmark that uses existing cap-weighted funds to provide low-cost passive exposure to market, size and value factors. SB ETFs exhibit potentially unintended factor tilts which may work to offset the return advantage from intended factor tilts. After decomposing total allocation component of SB funds into static and dynamic effects, I find that the benefit from dynamic factor allocation is neutral at best. This is consistent with the hypothesis that static factor exposure rather systematic rule-based rebalancing is the main driver of SB ETFs performance.
{"title":"How Smart are 'Smart Beta' ETFs? Analysis of Relative Performance and Factor Exposure","authors":"Denys Glushkov","doi":"10.2139/ssrn.2594941","DOIUrl":"https://doi.org/10.2139/ssrn.2594941","url":null,"abstract":"Using a comprehensive sample of 164 domestic equity Smart Beta (SB) ETFs during 2003-2014 period, I analyze whether these funds beat their benchmarks by tilting their portfolios to well-known factors such as size, value, momentum, quality, beta and volatility. I then test if Smart Beta funds harvest factor premiums more efficiently than their traditional cap-weighted benchmarks by periodic trading against price movements. While 60% of SB fund categories have beaten their raw passive benchmarks, I find no conclusive empirical evidence to support the hypothesis that SB ETFs outperform their risk-adjusted benchmarks over the studied period. Performance of SB funds is also insignificant when compared with the risk-adjusted blended benchmark that uses existing cap-weighted funds to provide low-cost passive exposure to market, size and value factors. SB ETFs exhibit potentially unintended factor tilts which may work to offset the return advantage from intended factor tilts. After decomposing total allocation component of SB funds into static and dynamic effects, I find that the benefit from dynamic factor allocation is neutral at best. This is consistent with the hypothesis that static factor exposure rather systematic rule-based rebalancing is the main driver of SB ETFs performance.","PeriodicalId":340994,"journal":{"name":"Institute for Quantitative Research in Finance 2015","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121120824","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Past trends in fundamentals linked to economic activity and inflation predict currency returns. We find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized Sharpe ratio of 0.70 and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that differences in past economic trends capture cross-country differences in carry.
{"title":"Economic Momentum and Currency Returns","authors":"Magnus Dahlquist, Henrik Hasseltoft","doi":"10.2139/ssrn.2579666","DOIUrl":"https://doi.org/10.2139/ssrn.2579666","url":null,"abstract":"Past trends in fundamentals linked to economic activity and inflation predict currency returns. We find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized Sharpe ratio of 0.70 and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that differences in past economic trends capture cross-country differences in carry.","PeriodicalId":340994,"journal":{"name":"Institute for Quantitative Research in Finance 2015","volume":"195 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-03-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133053436","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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