Does the Application of Smart Beta Strategies Enhance Portfolio Performance? The Case of Islamic Equity Investments

Smart beta strategies (SBs) are quite popular in passive investing due to their ability to outperform conventional market capitalization-weighted (MCW) portfolios. This paper investigates the impact of SBs in the case of constrained portfolios such as Shariah-compliant equity portfolios (SCEPs) by adopting three SBs: fundamental, equal weighting and low risk. The sample consists of equities from broader geographic markets including the USA, Canada, Australia, Europe, Middle East, Indonesia, and Malaysia for the period January 2003 to December 2016. The empirical findings suggest smart beta SCEPs not only outperform traditional MCW portfolios but also SCEPs following a MCW strategy. Low-risk SBs yield the highest risk-adjusted returns and reduction in the probability of fund redemption across all regions. The supremacy of the SBs clearly indicates the value proposition for investors and fund managers alike