Smart Beta ETFs: Adding Value for the ETF Investors?
Haakana, Joonas (2014)
Metropolia Ammattikorkeakoulu
2014
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-2014052610020
https://urn.fi/URN:NBN:fi:amk-2014052610020
Tiivistelmä
This paper has been written in order to provide an understanding of a financial product concept called smart beta exchange traded funds (ETF). As this particular financial product is a rather recent development, it is crucial to reveal certain factors, which are affecting on the ETF markets globally.
The thesis provides a comparison between the smart beta ETFs and traditional market capitalisation (market value) ETFs. The paper discusses whether the new innovation is worth investing in or if a traditional ETF outperforms the smart beta strategies. Firstly, the comparison starts by introducing several indexes applying the smart beta strategies. When the ETFs are tracking indexes, it is vital to have an idea how the system works at a basic level. In addition to introducing the indexes, the paper continuously compares the smart beta concept with the traditional market capitalisation approach. Secondly, the actual smart beta ETFs applying the strategies are considered. Each ETF is evaluat-ed according to the overall performance with a comparison to the underlying index and to the traditional ETF.
The actual research question of the paper is: “Do the smart beta ETFs add value for the ETF investor?” Due to the short track records of the funds applying the strategies and the lack of academic papers, it is motivating to dig into the subject and reveal points, which make the difference in between the two product types. The paper is not trying to convince an investor to invest in the smart beta strategies, but trying to raise a point why or why not it would be profitable to take advantage of smart beta ETFs. By critical data selection and analysis, the thesis offers an opportunity for the reader to make their own conclusions when answering the research question.
The preliminary results indicated by the analysis are not unambiguous. Generally, index-es following the smart beta strategies are outperforming the market capitalisation in-dexes to which they were compared, but smart beta ETFs are not as clearly beating the traditional ETFs. Each strategic approach of the smart beta ETF has their own strengths. One approach may reduce the volatility of the fund, whereas the other ac-cepts more risk to generate above average returns. The paper turns ever stone to an-swer for the question if the smart beta ETFs add value. At least, the paper´s analysis indicates strong characteristics of smart beta ETFs ability to generate alpha.
The thesis provides a comparison between the smart beta ETFs and traditional market capitalisation (market value) ETFs. The paper discusses whether the new innovation is worth investing in or if a traditional ETF outperforms the smart beta strategies. Firstly, the comparison starts by introducing several indexes applying the smart beta strategies. When the ETFs are tracking indexes, it is vital to have an idea how the system works at a basic level. In addition to introducing the indexes, the paper continuously compares the smart beta concept with the traditional market capitalisation approach. Secondly, the actual smart beta ETFs applying the strategies are considered. Each ETF is evaluat-ed according to the overall performance with a comparison to the underlying index and to the traditional ETF.
The actual research question of the paper is: “Do the smart beta ETFs add value for the ETF investor?” Due to the short track records of the funds applying the strategies and the lack of academic papers, it is motivating to dig into the subject and reveal points, which make the difference in between the two product types. The paper is not trying to convince an investor to invest in the smart beta strategies, but trying to raise a point why or why not it would be profitable to take advantage of smart beta ETFs. By critical data selection and analysis, the thesis offers an opportunity for the reader to make their own conclusions when answering the research question.
The preliminary results indicated by the analysis are not unambiguous. Generally, index-es following the smart beta strategies are outperforming the market capitalisation in-dexes to which they were compared, but smart beta ETFs are not as clearly beating the traditional ETFs. Each strategic approach of the smart beta ETF has their own strengths. One approach may reduce the volatility of the fund, whereas the other ac-cepts more risk to generate above average returns. The paper turns ever stone to an-swer for the question if the smart beta ETFs add value. At least, the paper´s analysis indicates strong characteristics of smart beta ETFs ability to generate alpha.