Do Smart Beta ETFs Capture Factor Premiums? A Bayesian Perspective

We investigate the factor exposure of smart beta ETFs under model uncertainty using Bayesian variable selection. We find that smart beta ETFs have exposures to several factors, including size, value, momentum, quality, volatility/low beta, and dividend yield. The average return contribution of these factors in the cross-section of smart beta ETFs is economically small and insignificant, at 0.05% per month, but there is significant variation across individual ETFs, suggesting that investors who wish to implement factor investing through smart beta ETFs should select ETFs carefully. Our results also show that the ability of smart beta ETFs to achieve factor exposures is hindered by their long-only restriction