The Smart Beta Mirage
SeriesErasmus Finance Seminars
Speaker(s)Shiyang Huang (HKU, Hong Kong)
Date and time
November 17, 2020
10:00 - 11:15
Abstract: We document and explain sharp performance deterioration of smart beta indexes after the corresponding smart beta ETFs are listed for investments. While smart beta claims to provide excess returns through factor exposures, adjusted by the aggregate market return, the return of smart beta indexes drops from 2.77% per year “on paper” before ETF listing to −0.44% per year after ETF listing. This performance deterio- ration cannot be explained by strategic timing in ETF listing nor explained by time trend in factor premia. In contrast, we find strong evidence of data mining in construct- ing smart beta indexes as the post-ETF-listing performance decline is much sharper for indexes that are more susceptible to data mining in backtests. Our results caution against the risk of data mining in the proliferation of ETF offerings as investors respond strongly to the stellar performance in backtests.
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