The Impact of Market Beta on Smart Beta Performance

Does it matter?

November 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • The market betas of smart beta funds vary significantly
  • The beta explains partially the underperformance of some strategies
  • Value and growth stocks have the largest beta delta in 20 years

INTRODUCTION

Low volatility investing boomed in the 2010s as falling interest rates supported low-risk stocks like REITs and utility companies, which represent highly leveraged business models. Simultaneously, asset managers and associated academics fed the investment community a steady diet of papers that provided the research needed for investment decisions and for committees.

Most investors likely recall from these papers that low-risk stocks outperformed, which upended the central tenet of investing theory that higher risk is compensated with higher returns. Naturally, the fine print states that such stocks only outperform on a risk-adjusted basis.

Unfortunately, taking the largest low volatility ETF, Invesco’s S&P 500 Low Volatility ETF (SPLV), as a proxy, shows that it did neither over the last 15 years. Its CAGR was 10.1% with a Sharpe ratio of 0.59, compared to 14.1% and 0.73 for the S&P 500. Even its maximum drawdown was worse, at -36% versus -33%.

Although low volatility funds have disappointed investors, we should acknowledge that they were indeed less volatile than the broader stock market, with an annualized volatility of 14.5% versus 17.1%. SPLV’s beta to the S&P 500 was only 0.6.

This raises an interesting question: can we attribute SPLV’s underperformance – and that of smart beta funds in general – to their low market betas?

VALUE VS GROWTH PERFORMANCE

We will evaluate the impact of market beta on smart beta funds by studying the two largest investment strategies, value and growth stocks, as proxied by the Vanguard Morningstar Value Index Fund (VTV) and Vanguard Morningstar Growth Index Fund (VUG). A performance comparison highlights the significant outperformance of growth stocks versus both value stocks and the broad market since 2018.