Deconstructing ‘Smart Beta’

August 21, 2014


I will look at the returns of some flagship smart-beta funds, to test whether smart-beta funds deliver risk-adjusted outperformance.

Complex strategies often debut in the crowded U.S. large-cap space; by now, plenty of smarty-pants U.S. large-cap funds have five years of returns history. The U.S. large-cap segment provides plenty of data to test claims that smart-beta funds generate risk-adjusted excess returns.

I used’s database to test 11 widely held U.S. large-cap ETFs with complex strategies, whose marketing material suggests these funds will outperform on a risk-adjusted basis.

Six Feet Under
Whether you look at one-, three- or five-year performance, these 11 U.S. large-cap smart-beta funds have produced returns in line with their risks. No more, no less. Whether you look for statistically significant alpha or Sharpe ratios, there’s virtually no risk-adjusted outperformance to back up the marketing claims.

It’s best to compare apples to apples, so I’ll focus most of my tests on a single equity segment, but I’ll branch out to look at all (nongeared) equity funds.

We’ll measure the risks these funds have taken and the returns they’ve earned relative to a plain-vanilla benchmark through March 31, 2014. I’ll use the MSCI USA Large Cap Index.

I tested one-, three- and, when extant, five-year fund total-return net asset values against gross total index returns. My results are shown in Figures 4a-4c.



Find your next ETF

Reset All