In part 1 of this article, we looked at the performance of the strategic beta funds. In this part will also look at the survivorship, risk-adjusted returns, factor exposure of these strategic beta ETFs.
Survivorship
The strategic-beta and cap-weighted funds included in this analysis are survivors. In both camps, survivorship rates were 80% or greater across all categories and time periods. The survivorship rates amongst strategic-beta ETFs are materially higher than those for traditional actively managed funds that we’ve documented in our Active/Passive Barometer. This difference is likely because this universe is much smaller, less saturated, and less mature than the market for active funds.
Risk-Adjusted Returns
What if strategic-beta ETFs outperform by simply taking on greater risk? To control for the level of risk these funds have assumed, we compared their Sharpe ratios (a measure of risk-adjusted performance) to those of their cap-weighted counterparts. Exhibit 4 shows average Sharpe ratios for each group across the nine categories for the one-, three-, five-, and 10-year periods ended March 31, 2017. By this measure, the gap between the two groups narrows significantly, indicating that the outperformance of strategic-beta ETFs in some categories may be at least partially attributable to the fact that they have, on average, assumed more risk.
