Endemic Data Snooping in Smart Beta Offerings?

Do returns for “smart beta” indexes, constructed to exploit research on one or more factors that predict individual stock returns, reliably predict returns for exchange-traded funds (ETF) introduced to track them? In the June 2020 version of their preliminary paper entitled “The Smart Beta Mirage”, Shiyang Huang, Yang Song and Hong Xiang compare returns of smart beta indexes before and after listings of corresponding smart beta ETFs (see the illustration below). They then explore four potential explanations of differences: (1) offeror timing of ETF introduction based on underlying factor performance, (2) offeror timing of ETF introduction based on underlying index performance, (3) long-term trends in factor premiums and (4) data snooping bias. Using introduction dates for 238 U.S. single-factor and multi-factor equity smart beta ETFs listed between 2000 to 2018 and price data for matched smart beta indexes as available through December 2019, they find that: (more…)