European ETF Factor Exposures: Evidence from a Regression- and Holdings-Based Analysis

Abstract

The article analyzes factor exposures of European equity exchange-traded funds (ETFs) according to 10-year regressions and a holdings-based analysis. While smart beta ETFs target certain factors explicitly, they and conventional market-capitalization-weighted ETFs (conventional ETFs) both can carry implicit exposures, too. The analysis shows that especially various sector ETFs carry strong regression-based factor exposures, which are only partially mirrored from a holdings-based view. Collectively, the conventional and smart beta ETFs show various significant factor loadings, which are mostly backed by the holdings-based analysis. Translating the flows in smart beta ETFs into a form of factor timing of market participants, the asset-weighted smart beta aggregate outperformed the market on an absolute and risk-adjusted basis.

TOPICS: Analysis of individual factors/risk premia, exchange-traded funds and applications, developed markets, performance measurement