The funds appear in order of their total annualized return, from high to low. The MSCI USA Large Cap benchmark data appears in bold.
These funds fit our benchmark well, with all but three of our 28 tests producing a goodness-of-fit over 0.90, and with three-fourths of our test funds hitting 95 percent co-movement. The MSCI USA Large Cap Index is a fair and well-fitting benchmark for these 11 funds.
When goodness-of-fit is this high, multiplying the benchmark’s returns by the fund’s beta gives a reliable predicted return. By extension, the regression’s alpha and its significance should rightly measure each fund’s excess returns.
The 28 tests of one-, three- and five-year alpha significance from our 11 funds produced only two alphas (DLN and SPHB) that are significant at the 95 percent level. One of the two is strongly negative. Except for these two, the headline smart-beta funds had no statistically significant risk-adjusted outperformance on a one-, three- or five-year basis.
Even at the most generous threshold of 90 percent significance, only three funds (one of which did so twice) generated meaningful alpha. The WisdomTree Large Cap Dividend Fund’s (DLN | A-95) produced 2.8 percent alpha over the three-year period and 2.5 percent alpha over the five-year period, and the PowerShares S&P High Quality (SPHQ | A-78) generated 3 percent per year of excess returns over the three-year period. Note that I couldn’t test SPHQ for the five-year period because it changed its underlying index in 2010. The current version of SPHQ was not quite four years old in March 2014.