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Have Strategic-Beta ETFs Delivered For Investors? (Part 2)

Survivorship, risk-adjusted returns and factor exposure.

Ben Johnson 20.07.2017

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.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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