Where Is the “Meat” in Smart Beta Strategies?

Abstract

In this study, the authors use principal component analysis (PCA) to address the relevance and style mix of four common smart beta strategy indexes: minimum volatility, momentum, fundamental value, and equal weight. They discover that the major proportion of equity smart beta beyond a market-cap-weighted index originates from the momentum smart beta strategy, while, for example, the value smart beta strategy has little relevance. The authors’ results show that returns to different smart beta strategies are partly driven by the same factor exposures related to multifactor models of asset pricing.

TOPICS: Analysis of individual factors/risk premia, statistical methods, performance measurement