The Smart Beta Mirage
Shiyang Huang (University of Hong Kong), et al.
June 2020
We document sharp performance deterioration of smart beta indexes after the corresponding smart beta ETFs are listed for investments. Adjusted by aggregate market return, the average return of smart beta indexes drops from 2.77% per year “on paper” before ETF listing to −0.44% per year after ETF listing. This performance deterioration cannot be explained by strategic timing in ETF listing nor explained by time trend in factor premia. We find evidence of data mining in constructing smart beta indexes as the post-ETF-listing performance decline is much sharper for indexes that are more susceptible to data mining in backtests. Our results caution the risk of data mining in the proliferation of ETF offerings as investors respond strongly to the stellar performance in backtests.
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New US Covid-19 cases for July 16 surged to a record high: 77,000-plus: Reuters
Fauci says new Covid treatment may arrive as early as this autumn: Bloomberg
Western nations say Russia is trying to steal coronavirus research: CNN
Hong Kong demands Taiwan officials sign ‘one China’ document: Reuters
Sliding real yields are key factor in boosting prices of risk assets: WSJ
Weekly US jobless claims continued rising last week by 1-million-plus: CNBC
US home builder sentiment rebounded in July to pre-coronavirus high: CNBC
30-year mortgage rate (US nat’l avg) falls below 3.0% for first time: NY Times
Philly Fed Mfg Index continues to reflect growth in July: Philly Fed
US retail sales rose for a second month in June but at much slower pace: Reuters

It’s old news that’s forever relevant: rebalancing is the worst choice for managing risk… except when compared with everything else. Granted, it’s not a silver bullet (nothing is) and in the hands of an amateur it can lead to trouble. But when paired with a reasonable asset allocation and a schedule of periodically resetting weights, rebalancing remains the first choice for managing portfolio risk.

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White House orders hospitals to send Covid-19 data to Washington: CNBC
Trump signs law sanctioning Chinese officials: Politico
China will stick with US trade deal despite new pressure from Washington: Reuters
US retail sales expected to rise for second month in today’s report: CNBC
Evidence strengthens that mask-wearing slows Covid-19 spread: VOX
Hacker hijacks high-profile Twitter accounts in cryptocurrency scam: TC
UK labor market continues to shed jobs but at slower rate in June: Reuters
China reports economic rebound from coronavirus: Q2 GDP up 3.2%: CNBC
Former Fed Chairman Bernanke: Congress should ‘save the states’: NY Times
US industrial output surged in June after dramatic decline in May: Bloomberg

Shares of technology companies continue to hold a wide lead in the US sector race this year, followed by a battle for second place in communication vs. consumer discretionary stocks, based on a set of exchange traded funds as of July 14.

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Promising results from Moderna’s first Covid-19 vaccine trial: NBC
Widespread mask use would control Covid-19 spread, says CDC director: STAT
China says it will retaliate after Trump ends Hong Kong’s special status: Reuters
Prime Minister Boris Johnson bans China’s Huawei from UK’s 5G network: CNN
Banks bulk up on cash to prepare for a surge in loan losses: NY Times
Sharp drop in global fertility rate will have “jaw-dropping” impact on societies: BBC
Fed’s Brainard: coronavirus still poses hefty economic risks for US: WSJ
Fed’s Kaplan expects pickup in US growth in 2021: CNBC
Apple scores a major victory on taxes in European Union: WSJ
US headline consumer price inflation up 0.6% in June–first gain in 4 months: MW
US small business optimism rebounded sharply in June: NFIB

Once upon a time the bond market could be counted on for sober analysis and clear thinking in the critical work of providing reliable economic indicators based on the so-called wisdom of the crowd. But those days appear to be long gone, or so one could surmise after reviewing the conflicting signals emanating from the US Treasury market of late.

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US states roll out new restrictions as coronavirus cases spread: WSJ
California rolls back economic opening as Covid-19 cases soar: CNBC
Immunity to Covid-19 may only last a few months, UK study finds: CNBC
US and Canada expected to extend non-essential travel ban: Reuters
US: parts of China’s South Sea claims ‘unlawful’: BBC
China’s imports rose in June–first gain since coronavirus crisis started: Reuters
UK economy rebounded at slower pace than expected in May: BBC
Eurozone industrial output posts a record rebound in May: MW
US monthly budget deficit expands to record $864 billion: NY Times

Equity prices in emerging markets posted the strongest gain for the major asset classes for the trading week through Friday, July 10, based on a set of US-listed exchange traded funds.

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White House undercuts Fauci re: US coronavirus response: NBC
Summer doesn’t appear to be slowing Covid-19’s transmission rate: WSJ
US warns citizens of “heightened risk of arbitrary detention” in China: CNBC
China announces sanctions on US officials in retaliation to Uighur policy: Reuters
Poland’s conservative President Duda narrowly wins re-election: BBC
US bankruptcies persist due to ongoing Covid-19 blowback: Bloomberg
Producer price index for US unexpectedly fell in June: CNBC
US stock market (S&P 500) begins trading week with drawdown near -6%: