Do Smart Beta ETFs Outperform the World Market? An empirical analysis on the returns of smart beta ETFs in the European and US markets

Abstract

This thesis investigates if smart beta ETFs in the US and/or Europe deliver excess return relative to the world market and how performance compares between the two markets. We focus on nine smart beta categories in our two-part analysis over a time period from January 2007 to June 2022. The constructed smart beta ETF portfolios are evaluated using risk-adjusted performance measures and a multi-factor benchmark model. The multi-factor benchmark model uses the MSCI World Index as the market factor and additional well-documented risk factors, thus used as our proxy for the world market. From this multi-factor model, we estimate alphas for the different categories in order to evaluate performance. We find that all the US smart beta ETFs categories in our sample, except low volatility, earn excess returns above the world market. The European portfolios do not perform as well with only three categories earning abnormal returns, these are momentum, fundamentals weighted, and equal weighted. These results are supported by the analysis of risk-adjusted returns, where the performance measures suggest a higher performance than the MSCI World Index when taking risk into account for most categories.