Measuring Smart Beta ETF Performance

May 08, 2017

There are many reasons investors may want to consider smart-beta ETF strategies in their portfolios. But perhaps the biggest reason is the most straightforward―the possibility of better returns.

That's the main selling point smart-beta ETF issuers use to market these products, and at least to some extent, the academic research backs them up.

That said, the research is clear: Not all smart-beta ETF strategies will outperform, and even for those that do, it’ll take a long enough investment time horizon to capture that potential outperformance.

It's in that context that readers should interpret the rest of this article, where we lay out the historical returns of various popular smart-beta ETFs compared to their market-cap-weighted counterparts. Just because a certain strategy is doing well or doing poorly in a particular arbitrary time frame doesn't mean it’ll continue to do so going forward: Factors perform and underperform in cycles.

Moreover, this article only contains a sampling of the plethora of smart-beta ETFs out there. These are among the most widely owned funds in the space with the largest amount of assets, but there are hundreds of others we don't touch on. Without further ado, here are the results ...

Value ETFs

Value ETFs are hands-down the most popular smart-beta ETFs. It helps that this factor is considered one of six that has historically outperformed the broader market over long time periods, according to MSCI research.

But the long time period the research measures and the shorter time period various value ETFs have been in existence are different, so it's no guarantee that ETF investors have seen this outperformance. Keep in mind each value ETF is different in the way it captures the factor. Some use price-to-earnings ratios, some use price-to-sales ratios, some use book values … the list goes on.

The iShares Russell 1000 Value ETF (IWD), with $37.3 billion in assets, the Vanguard Value Index Fund (VTV), with $30.4 billion in assets, and the iShares S&P 500 Value ETF (IVE), with $13.6 billion in assets, are the three largest U.S.-listed value ETFs today.

The below table includes the returns for these three funds since inception, along with the returns for their cap-weighted counterparts in the same time period:


Smart-Beta ETF Inception
Cap-Weighted Counterpart Return In
iShares Russell 1000 Value ETF (IWD) 22/05/2000 200.40 iShares Russell 1000 ETF (IWB) 147.08
Vanguard Value Index Fund (VTV) 26/01/2004 175.55 Vanguard Large-Cap ETF (VV) 186.57
iShares S&P 500 Value ETF (IVE) 22/05/2000 153.76 SPDR S&P 500 ETF (SPY) 138.24


As one can see from the table above, the time period measured and the ETF in question play a big part in determining whether a factor has outperformed or underperformed. IWD and IVE handily beat their cap-weighted counterparts since inception. But they were aided by the fact that their launches took place close to the peak of the dot-com bubble, when value stocks were relatively cheap and the broad market was filled with highly flying, overvalued tech stocks.

On the other hand, VTV, which didn't have that benefit when it launched in 2004, underperformed its cap-weighted counterpart since its inception. Again, the time period measured is key.


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