Which Smart Beta Strategies Worked in 2016?

Chief Investment Strategist

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.

Avg Annual Total Returns

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

In the large-cap multifactor category, the MSCI USA Diversified Multiple-Factor Index beat the S&P 500 by 171 basis points (bps) in 2016. However, the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index disappointed, underperforming the S&P 500 by more than 3 percentage points. In the small-cap segment, the MSCI USA Small Cap Diversified Multiple-Factor Index fared better, generating returns that exceeded those of the Russell 2000 by 181 bps. 
Success hinged on which smart beta factor one tilted toward, and in some cases, which smart beta index one used within a specific category. Although evaluating any smart beta strategy requires years of real-time performance, these 2016 results raise an interesting question: Is there an easier way to tap into the potential smart beta offers without taking on as much stock selection risk that typically accompanies these narrower smart beta strategies?
Based on a decade of real-time results, WisdomTree believes the answer is yes. 
In 2016, for example, WisdomTree was eight for eight: each and every one of WisdomTree’s core U.S. equity indexes beat the S&P 500 Index. Put another way, if one had simply owned each of the major size segments of the U.S. equity market dividend-weighted or earnings-weighted, one would have generated excess returns relative to owning the entire U.S. market capitalization-weighted.

Average Total Return

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

As we show in the table above:
- Broad Market: In the broad market, the dividend-weighted WisdomTree Dividend Index beat the Russell 3000 Index in 2016 by 424 bps. Its companion index, the WisdomTree Earnings Index, which weights all the profitable companies in the U.S. by the earnings they’ve generated in the prior year, beat the Russell 3000 by 256 bps. 
- Large Cap: The WisdomTree Earnings 500 Index outperformed the S&P 500 by 223 bps, while the WisdomTree LargeCap Dividend Index beat the S&P 500 Index by 377 bps. Moreover, both WisdomTree Indexes beat the above-mentioned multifactor large-cap strategies offered from MSCI and Goldman Sachs.
- Mid-Cap: Both the WisdomTree MidCap Dividend Index and the WisdomTree MidCap Earnings Index generated returns in excess of 20%, outperforming the S&P 500 by more than 8 percentage points.
- Small Cap: And in the small-cap space, both the WisdomTree SmallCap Dividend Index and the WisdomTree SmallCap Earnings Index generated 2016 returns in excess of 30%, handily outpacing the 21% return posted by the Russell 2000, and the 23% return tallied by the MSCI multifactor small-cap strategy. Now, that’s smart beta!
Although many have overlooked the WisdomTree strategies as ways to implement smart beta strategies in the core of their portfolios, the WisdomTree ETFs tracking these proprietary indexes have all been trading in the marketplace for the past 10 years, generating a compelling track record in the process.

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.


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. 

Important Risks Related to this Article

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About the Contributor
Chief Investment Strategist
Luciano Siracusano is WisdomTree’s Chief Investment Strategist. He is the co-creator, with CEO Jonathan Steinberg, of WisdomTree’s patented Indexing methodology. Mr. Siracusano led WisdomTree’s sales organization from October 2008 until June of 2015, while also serving as the firm’s Chief Investment Strategist. Luciano stepped down as WisdomTree’s Head of Sales in 2015 to focus full time on his duties as Chief Investment Strategist. From 2001 until October 2008, Luciano was WisdomTree’s Director of Research and was responsible for the creation and development of WisdomTree’s proprietary stock indexes. Luciano is a regular guest on CNBC and FOX Business, and speaks and writes frequently on ETFs, indexing and global financial markets. A former equity analyst at Value Line, Luciano began his career as a speechwriter for former New York Governor Mario Cuomo and HUD Secretary Henry Cisneros. He graduated from Columbia University with a B.A. in Political Science in 1987.