Revolutionizing Emerging Market Equity Investments: The Role of Smart Beta Strategies

Abstract

Investors are exploring new ways to navigate the constantly changing equity markets in emerging economies. Smart beta strategies, which use rule-based algorithms to boost returns and manage risk, are emerging as a promising solution. This research investigates how effective smart beta strategies are for retail investors. In contrast to a benchmark index, the study evaluates various smart beta strategies, including high alpha, beta, low volatility, value, growth, quality, momentum investing and combination strategies that consist of more than one factor. Based on the daily data from 1 October 2009 to 31 March 2023 of these strategic indices, the findings reveal that all strategies excluding the beta factor strategy consistently outperform benchmark index on various risk-adjusted return metrics. Notably, the momentum strategy closely followed by the alpha strategy is the best-performing approach for medium- and long-term horizons. Based on the data, these smart beta strategies have a greater downside beta than an upward beta, which suggests that they are more sensitive to declining markets. Comparatively, the combination strategies exhibit reduced sensitivity to declining markets, highlighting the safety and benefits of diversification among smart beta strategies. Furthermore, many of these techniques regularly outperform market returns and show effective market timing. These insightful observations help investors understand how smart beta strategies can be beneficial and strategically used in volatile market environments.