Smart-beta funds rake in money despite performance concerns

New research suggests that smart-beta funds have not done as well as hoped

Smart-beta funds rake in money despite performance concerns
In an effort to capture the best features of active and passive investment, investors have flocked to smart-beta funds. But one recent study suggests they aren’t doing as well as expected.

Studying data on 560 funds from UBS Group AG, UBS ETF strategist David Perlman has found that only about 32% to 39% outperformed their closest cap-weighted index over a 10-year period, reported the Wall Street Journal. Counting the risk taken by ETFs for following benchmarks other than broad indexes, and that outperformance rate shrinks to 25% to 32%, Perlman said.

Even in 2017 when the numbers improved, the proportion of outperformance didn’t exceed 50%. “The biggest headwind has been that value has lagged and a lot of smart beta has a value tilt,” Perlman said.

Citing figures from Morningstar, the Journal said smart-beta funds drew in US$65 billion in 2017 through mid-December. reports that he fastest growth happened to Vanguard Value ETF (VTV), attracting just under US$5 billion and taking its assets to around $37 billion; the largest smart-beta fund was iShares Russell 100 Value ETF, with more than $41 billion in assets.

While the size of the sample set used by UBS is impressive, Perlman’s conclusions are still debatable. By’s count, there are more than 900 smart-beta funds. And throughout the ETF industry, definitions of smart-beta differ; Vanguard doesn’t count any of its existing ETFs as smart-beta, while BlackRock counts attaches the “smart beta” label to fewer of its funds compared to outside researchers.

Citing research by UBS quantitative strategist Ronald Sutedja, Perlman said smart-beta investments work best when combinations of factors are used. In particular, the research found the best approach is to equally weight size, low volatility, dividend yield, quality, and momentum in choosing portfolio holdings.

Weighing in on the issue, CEO David Nadig said patience is crucial in smart-beta investments, as other research suggests even well-thought-out strategies can take seven years to beat the market. “Smart beta works by reducing risk in drawdowns, not by juicing returns in up markets,” he said.

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