Smart Beta Returns Over Time

May 29, 2019

Growth & Dividend ETFs
After value, two of the most popular types of smart beta ETFs are those focusing on growth and dividends.

Growth isn’t one of the factors that academic research suggests tends to outperform over time, but that hasn’t stopped billions of dollars from chasing it. On the other hand, dividend is a factor said to beat the broader market over time, but there’s also been plenty of concern that such strategies may have become overvalued in today’s low-yield world.

The iShares Russell 1000 Growth ETF (IWF), with $44 billion in assets, the Vanguard Growth ETF (VUG), with $40 billion in assets and the iShares S&P 500 Growth ETF (IVW), with $23 billion in assets, are the three largest funds targeting the growth factor. Their returns are shown in Figure 2.

 

 

The returns for the three largest growth ETFs are the mirror image of the situation with the value ETFs. IWF and IVW, which launched in 2000, sharply underperformed their market-cap-based counterparts as growth stocks struggled in the aftermath of the dot-com bust. However, VUG has outperformed since its launch in 2004.

In terms of dividend ETFs, the Vanguard Dividend Appreciation ETF (VIG), with $34 billion in assets, the Vanguard High Dividend Yield ETF (VYM), with $23.5 billion in assets, the SPDR S&P Dividend ETF (SDY), with $18.6 billion in assets and the iShares Select Dividend ETF (DVY), with $17.3 billion in assets, are the largest funds in the space. Their returns are shown in Figure 3.

 

 

Based on the returns for these four funds since inception, it looks like dividend ETFs have largely underperformed the broader market over the past decade and a half.

Other Factors
There are plenty of smart beta ETFs other than those already mentioned that also target the value, growth and dividend factors. We’ve primarily looked at large cap U.S. equity ETFs, but factors can be and is applied to other areas of the market, including mid  and small caps, international equities and sectors.

Of course, there are also many more factors that ETF issuers can and do use to select and/or weight the holdings of a portfolio. A few of those were mentioned earlier, including low size, low volatility, quality and momentum.

The $15.8 billion Guggenheim S&P 500 Equal Weight ETF (RSP) is a fund widely considered to be one that effectively targets the low size factor. By equally weighting its holdings, RSP has a much smaller cap tilt than a cap-weighted S&P 500 fund.

The $25.5 billion iShares Edge MSCI Min Vol U.S.A. ETF (USMV) is the largest fund targeting the low volatility factor. The $11 billion iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL) focuses on quality, and the $8.4 billion iShares Edge MSCI U.S.A. Momentum Factor ETF (MTUM) focuses on momentum.

Figure 4 includes returns for these funds since inception, along with the returns for their market-cap-based counterparts in the same period.

 

 

With the exception of the low vol ETF, which barely lagged its counterpart, each of the other three factor ETFs easily outperformed. Two of them, RSP, which tilts toward stocks of small companies, and MTUM, which holds stocks in an uptrend, beat the socks off the competition.

Find your next ETF

Reset All