Smart Beta ETFs: Can Smart Beta Add Value to Investors?

Christian Ravn Poulsen & Mathias Vestergaard Eriksen

Student thesis: Master thesis

Abstract

In literature and amongst investors disagreement prevails, whether it is possible to outperform the market consistently. Proponents of the efficient market hypothesis claim that it is not possible, and that excess returns in given periods require luck rather than skills. In this thesis we are evaluating the performance of Smart Beta ETFs compared to the performance of traditional passive ETFs. Smart Beta strategies have gained popularity due to the combination of passive and active investing, making it possible for investors to construct systematic, rule-based portfolios without the cost associated with actively managed portfolios. In this thesis, we have placed Smart Beta within a historical context by describing the underlying financial theories, which established Smart Beta strategies as a concept. Furthermore, we will discuss the arguments of proponents and opponents on the ability of Smart Beta strategies to outperform the market on a risk-adjusted basis. Based on ten US passive and Smart Beta ETFs, analyzed through traditional performance measurements, we are examining the performance for the time periods 2016-2018 and 2009- 2018, respectively. The findings of this thesis indicate that the relative performance is sensitive to a chosen period. The analysis of the three-year period found that the Smart Beta ETFs did outperform the traditional passive ETFs. This was not the case, when analyzing the ten-year period, as the passive ETFs outperformed the Smart Beta ETFs in this period. This thesis finds that the growth over time of the Smart Beta and passive ETFs had a strong correlation.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages118