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The Journal of Wealth Management

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Intelligent Selection of Smart Beta Mutual Funds

C. Edward Chang, Thomas M. Krueger and Cedric Tresor Mbanga
The Journal of Wealth Management Summer 2019, 22 (1) 10-23; DOI: https://doi.org/10.3905/jwm.2019.22.1.010
C. Edward Chang
is a professor of finance at Missouri State University in Springfield, MO
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Thomas M. Krueger
is the J.R. Manning Endowed Professor of Innovation in Business Education and chair of the Accounting and Finance Department at Texas A&M University-Kingsville in Kingsville, TX
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Cedric Tresor Mbanga
is an assistant professor of finance at Missouri State University in Springfield, MO
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Abstract

Unlike index funds, smart beta mutual funds (SBFs) attempt to beat the market by weighting securities based on price, value, momentum, and other fundamental characteristics through careful adherence to trading rules based upon these traits. Since their debut, SBFs have attracted over a trillion dollars. This research attempts to ascertain whether SBFs beat their category averages and whether limiting the costs of investing in SBFs can enhance their performance relative to category averages. Our findings show that SBFs do not necessarily outperform the market, as measured using category averages. Return and risk are both higher, resulting in risk-adjusted performance that is very similar to the average of their respective category. However, performance can be greatly improved by selecting SBFs that charge less for their services. Limiting the sample to those SBFs with the lowest 25% of expense ratios results in even better performance.

TOPICS: Mutual fund performance, factor-based models, performance measurement

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The Journal of Wealth Management: 22 (1)
The Journal of Wealth Management
Vol. 22, Issue 1
Summer 2019
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Intelligent Selection of Smart Beta Mutual Funds
C. Edward Chang, Thomas M. Krueger, Cedric Tresor Mbanga
The Journal of Wealth Management Apr 2019, 22 (1) 10-23; DOI: 10.3905/jwm.2019.22.1.010

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Intelligent Selection of Smart Beta Mutual Funds
C. Edward Chang, Thomas M. Krueger, Cedric Tresor Mbanga
The Journal of Wealth Management Apr 2019, 22 (1) 10-23; DOI: 10.3905/jwm.2019.22.1.010
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