Behind Smart Beta ETF Dispersion

February 12, 2018

For instance, the MSCI Momentum Index methodology, which underlies the iShares Edge MSCI USA Momentum Factor ETF (MTUM), does not apply sector neutralization when constructing the factor index, although it does take into account the security’s market capitalization in the final index weighting, which can help temper the overall sector exposures.


Figure 2: 2017 Calendar Year Returns Of Representative Single-Factor Momentum ETFs vs. S&P 500 ETF (SPY)


However, some smart-beta ETFs perform sector neutralization so as to minimize the risk contribution from sector over/underweighting versus a market-cap-weighted benchmark like the S&P 500. Figure 3 displays the technology weightings of representative momentum smart-beta ETFs. Although it is not a one-to-one relationship, better-performing momentum ETFs generally had higher technology weightings.


Figure 3: Latest Reported Technology % Weighting Of Representative Single-Factor Momentum ETFs vs. S&P 500 ETF (SPY)


For value-based smart-beta ETFs, the opposite happened: Value-based ETFs that “sector neutralized” generally outperformed those that didn’t (e.g., the Russell 1000 Value Index).

(Figure 4 displays the 2017 calendar-year returns of representative single-factor value-based ETFs versus the S&P 500 ETF Trust (SPY). Figure 5 displays the technology sector weighting.)


Figure 4: 2017 Calendar Year Returns of Representative Single Factor Value ETFs vs. S&P 500 ETF (SPY)


Figure 5: Latest Reported Technology % Weighting of Representative Single-Factor Value ETFs vs S&P 500 ETF (SPY)



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