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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Do Smart Beta ETFs Outperform Traditional Market Capitalization Weighted Indices? |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 66 |
| Date | 2016 |
| Abstract Text | Smart beta exchange traded funds, also known as strategic or alternative beta ETFs, have been a hot topic in financial press in recent years. Broadly defined, these funds track indices that are not based upon market capitalization weighting or screening scheme. They have gotten very popular in recent years and everyone is trying to explain this trend. Surely, as one of the reasons for this recent gained popularity is the claim of smart beta ETF managers, that their products can outperform traditional ETFs at the market. This paper analyses this hypothesis by testing the performance of 38 US domiciled alternatively weighted ETFs and indices. The analysis with done on three different regressions: l) Smart Beta ETFs versus Benchmark Indices 2) Smart Beta ETFs versus Benchmark Indices ETFs 3) Smart Beta Indices versus Benchmark Indices The paper didn't decide on which benchmarks should be taken for the analysis, the market capitalization weighted benchmark indices are taken from smart beta ETFs' fact sheets. By assessing the performance of the 38 smart beta funds over market capitalization weighted indices and traditional ETFs, this paper cannot find evidence of smart beta's outperformance. Only one alternatively weighted fund outperformed its self-declared market capitalization weighted benchmark index. Due to high rebalancing costs, tracking an alternatively weighted index gets more costly than tracking a traditional one. Therefore this paper also assessed the performances of smart beta indices over market capitalization indices and found again no evidence of outperformance. Since the inception date of the funds, none of the index achieved an outperformance over its market capitalization weighted benchmark index. All the regressions were also run on different business cycles without finding different results. However, by expanding the time horizon to the last 15 years, an outperforrnance of alternatively weighted indices over their cap-weighted benchmark indices was detected. More than the half of the analyzed smart beta indices achieved positive alpha over their benchmarks. This implies that an outperformance of alternatively weighted strategies over market capitalization weighted strategies is possible in the longer run. However, this paper doesn't find evidence that this outperformance can be carried on ETFs that track these indices, which in contrary to an index, can be bought and sold. By expanding the analysis and by adding additional risk factors, the paper concludes that the most smart beta ETFs load positively on the common factors such as size, value and momentum. The risk-adjusted alpha is however not different from zero. Besides the analysis of outperformance, this paper finds evidence that the total expense ratio is a negative indicator for performance. In contrary to logical beliefs, the cheaper smart beta ETFs are associated with higher performance than the more expensive ones. |
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