Replicating Funds via S&P 500 & Smart Beta ETFs

Is the whole greater than the sum of the parts?

December 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Mutual funds and ETFs can be replicated via the S&P 500 and long-short factors
  • An even simpler replication with the S&P 500 and smart beta ETFs works equally well
  • However, this is less effective for long-short or unique strategies


Almost all investment products are bets on economic growth. Neither stocks, bonds, commodities, nor private asset classes like venture capital or private equity will do well when the economy is heading into a recession. Given this, most investment products can be decomposed into equities plus something, where a surprising number of asset classes and strategies like CLOs or convertible bonds represent nothing more than combinations of the S&P 500 and cash (read CLOs – Diversifier, or another Equity Clone? and Don’t Convert to Convertible Bonds).

Naturally this “something” can create value for investors in some cases, eg factor exposures that are desirable. Unfortunately for active fund managers, capital allocators have increasingly more tools at their disposal to dissect track records and replicate strategies using cheaper instruments.

In this research article, we will attempt to replicate factor-focused funds using smart beta ETFs.


We use the Homestead Value Fund (HOVLX) as a case study in this analysis. The fund has a concentrated portfolio of 47 stocks that are selected on trading at low valuations, manages $800 million of assets, and charges a management fee of 0.62% per annum, which is relatively reasonable for an active value-focused mutual fund.

First, we run a factor exposure analysis for the last five years that highlights positive exposure to the value factor, and negligible exposures to other factors, in line with its investment philosophy. However, the beta to the S&P 500 was 0.96, which underlines that the fund is largely a bet on the U.S. stock market (try Finominal’s