Do Smart Beta ETFs Capture Factor Premiums? A Bayesian Perspective

Alexandre Rubesam and Soosung Hwang ()

No 2018-ACF-04, Working Papers from IESEG School of Management

Abstract: We investigate which factors matter to explain the returns of smart beta and conventional ETFs using a Bayesian approach. Smart beta ETFs are well explained by the market, size and the betting-against-beta factor, whereas conventional ETFs are well explained by the market, the quality-minus-junk factor, and a value factor. Smart beta ETFs benefit from their exposure to the betting against beta factor, however this is o↵set by their negative alphas, while the factor exposure of conventional ETFs is purely detrimental. Our results suggest investors should be skeptical about the ability of smart beta ETFs to capture factor premiums.

Keywords: Smart Beta; strategic beta; factor investing; factor selection; Bayesian variable selection (search for similar items in EconPapers)
Pages: 26 pages
Date: 2018-05
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