Which Smart Beta Strategies Worked in 2016?

In 2016, billions of dollars flowed into so-called smart beta exchange-traded funds (ETFs)—funds that select stocks based on their exposure to individual factors such as low volatility, momentum or quality. Billions more flowed into funds tracking indexes incorporating several of these factors simultaneously—so-called multifactor funds.
So, how did these smart beta factors do relative to the S&P 500 Index? On balance, results were so-so: it was very much of a mixed year for many of the U.S. smart beta strategies.
If you use the MSCI single-factor indexes as your proxy, momentum, quality and minimum volatility all underperformed the S&P 500 Index. Of the major factors, only value and size outperformed. The MSCI USA Enhanced Value Index returned 15.9% and the Russell 2000 Index, a proxy for small-cap stocks, generated a 21.3% return, both handily beating the nearly 12% total return posted by the S&P 500, a proxy for the broad U.S. equity market.

For definitions of indexes in the chart, visit our glossary.

Because the WisdomTree Indexes rebalance annually back to a measure of relative value, once a year they trade away from the price-driven, momentum-fueled movement of cap-weighted benchmarks. This gives WisdomTree a chance to tap into return premiums like value and quality, and in the case of our mid- and small-cap funds, size, in a disciplined, repeatable way, while providing broad exposures to traditional asset classes. Thus, WisdomTree provides the type of “multifactor” exposure investors are looking for. Because it’s never easy to predict which smart beta factor will outperform in a given year, it is probably best to get some exposure to most or all of them through a more diversified approach. Now, with real-time results coming in, it’s becoming easier to evaluate some of the newer strategies against those, like WisdomTree’s, that have been tested in real time over full market cycles.

Conclusion

All eight of WisdomTree’s core, size-segmented U.S. dividend-weighted and earnings-weighted equity Indexes beat the S&P 500 Index in 2016. In the process, they also beat many of the newer “factor-based” entrants into the smart beta indexing space. But 2016 is just part of a larger story. Since their respective real-time inceptions, spanning the last 10 years, seven of WisdomTree’s eight core U.S. Indexes have also outperformed their comparable capitalization-weighted peer. At a time when investors are attempting to complement beta exposures or replace active managers by combining single-factor strategies—or adopting multifactor strategies—WisdomTree is one of the few “smart beta” providers with a proven performance record.