Smart Beta ETFs. Smart Investment or Smart Marketing?

Abstract: Smart Beta is a relatively new investment strategy that builds further on theses such as factor investing and fundamental indexation. As of now, there are conflicting views of this strategy. Hence, in this paper, we aim to find an answer to whether Smart Beta is indeed smart or not. When comparing the returns of Smart Beta ETFs to the returns of passive benchmarks, we find that no Smart Beta ETF category outperforms. However, when regressing Smart Beta ETFs against mutual funds, we find that Smart Beta in fact could be a disruptive innovation for active management. In addition, when added as a complement to a self-constructed portfolio, consisting of 60% equity and 40% bonds, 38% of Smart Beta ETFs actually contributed positively to the performance of the portfolio. Investing in a single Smart Beta ETF would hence not be a better course of action than investing in a passive index fund. However, Smart Beta ETFs as a complement or a combination of Smart Beta ETFs might enable you to achieve greater returns. In that way, Smart Beta may be more than just smart marketing.