For the record, I don’t believe in the existence of “smart” beta. The phrase is actually a cute invention coined by Wall Street marketers. Furthermore, the historical record does not support the claim that beta is always “smart.”
As proof, I examined three distinct segments of the bond market and discovered that allegedly “smart” beta can be dumb.
For example, the iShares iBoxx Corporate Investment Grade Bond Fund (LQD)—a bond ETF with an old school market cap weighting approach—has gained more than 17% over the past three years while its new-school alternative beta competitor the PowerShares Fundamental Investment Grade Bond Fund (PFIG) has delivered a subpar 5.38% return.
This sort of considerable underperformance in any market—especially the ungenerous bond market—isn’t a very smart result.
I also found significant underperformance by so-called “smart” beta ETFs in the high yield bond market.