Smart Beta ETFs: A Bird’s-Eye
View of the Market and Analysis of Its Performance Trends

Abstract

A new category of exchange-traded funds, which can arguably be referred to as “smart beta ETFs,” has lately issued a meaningful challenge to traditional, market-value-oriented ETFs. Although the concept seems new, a review of the relevant academic literature shows that most of these new ETFs find their roots in traditional ETFs.

After having divided smart beta ETFs into three distinct categories, a thorough review shows that their share of the overall ETF market is rapidly expanding. In particular, factor and fundamental smart beta ETFs have established themselves as the dominant duo relative to low-volatility ETFs. But in terms of risk-adjusted performance, this study shows that investors in smart beta ETFs have, on average, not been appropriately compensated for the risks they have taken in comparison to investors who put their money into more traditional, cap-weighted ETFs.