How Well Do Factor ETFS Capture the FAMA–French Factors?

Vol. 20, No. 1, 2022
by Nicholas Apergis, Thomas Poufinas, Alexandros Panagakis and Ioannis Ritsios

Institutional investors are investigating systematic, rule-based investment directions other than purely passive investing, such as factor-based investing. This study examines how well the factor-ETFs capture the Fama–French factors and attempts to explain their difference from the smart beta indexes applied in practice. The findings document that the market factor explains a substantial part of the expected returns, with the remaining factors, except momentum, posting smaller or no contribution. Style ETFs exhibit mixed results in capturing their referenced style, with almost all of them exhibiting non-neutral momentum. The findings are of interest to investment managers, investors, risk managers, and stock exchanges.