What Is in Your Smart Beta Portfolio? A Fundamental and Macroeconomic Analysis

Abstract

With smart beta becoming increasingly popular, a swath of strategies have been designed to provide access to a wide array of return-enhancing risk in the marketplace. Many strategies claim to provide access to the same factors, and one might reasonably expect that they would be similar. Yet the ways they are constructed can vary widely. Seemingly small distinctions in index construction can lead to portfolios that have differential drivers of risk and return and unequal exposures to factor and sector biases. They can likewise have an effect on the macroeconomic environments in which the portfolios perform, which is particularly important in multifactor portfolios where a number of factors are blended. This article reviews some typical strategies that seek to track common factors (i.e., volatility, momentum, quality, growth, value, dividend yield, and size) in the U.S. market in order to better understand the characteristics of these strategies, from both a fundamental and a macroeconomic perspective. The same analysis is then extended to a multifactor portfolio.

TOPICS: Analysis of individual factors/risk premia, mutual funds/passive investing/indexing, portfolio construction