chinazh
The smart beta ETF vogue is no threat to factor investing

The smart beta ETF vogue is no threat to factor investing

29-03-2017 | 研究

The success of smart beta ETFs has raised concerns over a possible ‘overcrowding’ of factor strategies. But a recent analysis of US equity ETF factor exposures, by Robeco’s David Blitz, suggests this is far from being the case.

  • David Blitz
    David
    Blitz
    Head of Quant Research

Speed read

  • Smart beta ETF growth has raised concerns over possible overcrowding 
  • Analysis of US equity ETF sample demonstrates that this is not so 
  • On aggregate, US equity ETFs show ‘plain’ market exposure

Exchange traded funds (ETFs) have become an increasingly popular way for investors to gain exposure to equity markets at limited cost. Among the most dynamic segments of the ETF industry, in recent years, are those specifically designed to capture specific factors such as value, momentum or low risk.

Factor investing is based on the existence of various premiums that can be systematically harvested in order to achieve consistent higher risk-adjusted returns and better diversification than traditional market cap-weighted indexes. In recent decades, many academic studies have advocated its use and investors can now choose from a wide variety of factor-based products, in particular ETFs. These solutions, often branded as ‘smart beta’, follow indices specifically designed to give exposure to some of the most commonly exploited factors.

The commercial success of smart beta ETFs, however, has raised serious concerns over a possible ‘overcrowding’ of factor strategies and the fact that the academically-documented premiums might disappear. But a recent academic paper by David Blitz, Robeco’s Head of Quantitative Equity Research, focusing specifically on the US equity market, suggests these fears are exaggerated.

关注官方微信
QR code Wechat

Plain market exposure

Indeed, while some US equity ETFs do show significant exposure to factors that successfully deliver premiums, this is not the case at aggregate level. Detailed analysis shows great disparities in factor exposures across the US equity ETF universe. When all exposure is added together, all that actually remains is plain market exposure, or beta.

In his study, Blitz analyzed the excess returns of all the ETFs that are listed in the US and that invest in US equities and that had at least a 36-month return history at the end of 2015. This amounted to 415 individual funds, with combined assets under management of over USD 1.2 trillion. That’s about 5% of the value of the entire US stock market. Data on the risk-free return, market excess return and the size, value and momentum factor returns was obtained from Professor Kenneth French’s online data library.

These findings refute the idea that factors are being arbitraged away by ETF investors’

Based on this broad sample, Blitz regressed ETF returns on the returns of various well-established factors, over the 2011-2015 period. He found that many funds offer a large positive exposure to factors, such as size, value, momentum and low volatility. As such, they could be considered suitable instruments for investors seeking to systematically harvest these premiums, except perhaps in the case of momentum.

At the same time, however, many other US equity ETFs showed a large negative exposure towards these factors. And in fact, on aggregate, the overall exposures towards the size, value, momentum and low volatility factors turned out to be very close to zero.

Taking low volatility as an example

The increase in the popularity of low volatility strategies is a good illustration of this. At first sight, investors looking only at the billions of dollars invested in ETFs specifically targeting the low-volatility anomaly may rightfully be concerned about possible overcrowding. However, a closer look shows the funds in question only represent a small fraction of the total ETF market.

Moreover, when looking at the other end of the spectrum, it turns out that there are a similar number of ETFs which provide exactly the opposite factor exposure, with a significant bias towards high-volatility stocks. These ETFs are typically sector-focused funds. They are obviously not labelled as ‘high-volatility funds’ but they do effectively neutralize the exposure of the low-volatility ETFs.

These findings refute the idea that factor premiums are rapidly being arbitraged away by ETF investors, and also the related concern that factor strategies could be turning into overcrowded trades.

免责声明:

本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。
Logo

Disclaimer

The information contained in the website is solely intended for professional investors. Some funds shown on this website fall outside the scope of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht) and therefore do not (need to) have a license from the Authority for the Financial Markets (AFM).

The funds shown on this website may not be available in your country. Please select your country website (top right corner) to view the products that are available in your country.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

Please confirm that you are a professional investor and/or institutional investor and that you have read, understood and accept the terms of use for this website.

I Disagree