Research

Two Thirds of Smart Beta ETFs Will Never Beat the Market

Published July 3, 2023

It's Market Beta All the Way Down

Beating a cheap cap-weighted market fund on a risk-adjusted basis is the core reason to pay for a differentiated ETF. If the product still behaves like plain market beta, the hurdle is high from the start.

The figures below focus on US ETFs with market beta near 1.0. They separate passive benchmark-like exposure from funds carrying a meaningful non-market factor sleeve, then show how little capital actually ends up in the group that improves on the market.

Beta-Near-One ETF AUM: Passive vs Factor
US ETFs with market beta between 0.90 and 1.10, using a 1.0% non-market factor-beta cutoff
Beta-Near-One ETF AUM: Passive vs FactorAUM breakdown of the current beta-near-one US ETF cohort, separated into passive-like funds and factor-bearing funds, then split by whether backtested relative Sharpe lagged or beat VTI. Current snapshot based on the latest US ETF analysis output.Passive laggards: 50.9% of AUM. 231 funds | $3.02T.Factor laggards: 24.8% of AUM. 293 funds | $1.47T.Passive beaters: 14.9% of AUM. 46 funds | $0.88T.Factor winners: 9.3% of AUM. 82 funds | $0.55T.
AUM breakdown of the current beta-near-one US ETF cohort, separated into passive-like funds and factor-bearing funds, then split by whether backtested relative Sharpe lagged or beat VTI.
Current snapshot based on the latest US ETF analysis output.

Market Beta is Free. Beating it is Hard

Most beta-near-one ETF assets still sit in giant passive benchmarks. That is the baseline a factor product has to beat after fees, turnover, and implementation drag.

The passive stack below is dominated by a handful of broad-market funds whose job is simple: deliver market exposure cheaply and at scale.

Largest Passive Benchmark ETFs
Broad-market passive funds inside the passive beta-near-one cohort
Largest Passive Benchmark ETFsThe passive benchmark stack is concentrated in a few giant funds. These are the products a factor ETF has to beat on a risk-adjusted basis. Current snapshot based on the latest US ETF analysis output.SPY: 24.0%. SPDR S&P 500 ETF Trust | Rel. Sharpe 0.99x.VOO: 23.7%. Vanguard S&P 500 ETF | Rel. Sharpe 1.10x.IVV: 22.9%. iShares Core S&P 500 ETF | Rel. Sharpe 0.93x.VTI: 18.1%. Vanguard Total Stock Market ETF | Rel. Sharpe 1.00x.ITOT: 2.5%. iShares Core S&P Total U.S. Stock Market ETF | Rel. Sharpe 0.99x.SPLG: 2.2%. SPDR Portfolio S&P 500 ETF | Rel. Sharpe 1.00x.SCHX: 2.0%. Schwab U.S. Large-Cap ETF | Rel. Sharpe 1.04x.VV: 1.6%. Vanguard Large-Cap ETF | Rel. Sharpe 1.01x.IWB: 1.5%. iShares Russell 1000 ETF | Rel. Sharpe 0.94x.SCHB: 1.3%. Schwab U.S. Broad Market ETF | Rel. Sharpe 0.92x.
The passive benchmark stack is concentrated in a few giant funds. These are the products a factor ETF has to beat on a risk-adjusted basis.
Current snapshot based on the latest US ETF analysis output.

The Winning 10%

The genuine winners exist, but they are scarce. Only a small share of beta-near-one ETF capital combines a material non-market factor sleeve with superior backtested relative Sharpe versus the market.

The Winning 10%
Largest factor-bearing winners by AUM inside the beta-near-one cohort
The Winning 10%These funds combine a meaningful non-market factor sleeve with backtested relative Sharpe above 1.0. Together they still represent only a minority of beta-near-one ETF capital. Current snapshot based on the latest US ETF analysis output.VTV: 24.6%. Vanguard Value ETF | Rel. Sharpe 1.16x | Non-mkt beta 1.64%.QQQM: 7.7%. Invesco NASDAQ 100 ETF | Rel. Sharpe 1.06x | Non-mkt beta -2.79%.IWR: 7.3%. iShares Russell Midcap ETF | Rel. Sharpe 1.20x | Non-mkt beta 2.01%.DFAC: 6.1%. Dimensional U.S. Core Equity 2 ETF | Rel. Sharpe 1.08x | Non-mkt beta 1.39%.VBR: 5.9%. Vanguard Small Cap Value ETF | Rel. Sharpe 1.01x | Non-mkt beta 2.38%.COWZ: 4.7%. Pacer US Cash Cows 100 ETF | Rel. Sharpe 1.15x | Non-mkt beta 1.88%.MDY: 4.5%. SPDR S&P MidCap 400 ETF Trust | Rel. Sharpe 1.00x | Non-mkt beta 1.69%.IUSV: 3.7%. iShares Core S&P US Value ETF | Rel. Sharpe 1.06x | Non-mkt beta 1.72%.FNDX: 3.3%. Schwab Fundamental U.S. Large Company ETF | Rel. Sharpe 1.27x | Non-mkt beta 1.75%.AVUV: 3.0%. Avantis U.S. Small Cap Value ETF | Rel. Sharpe 1.02x | Non-mkt beta 4.03%.MTUM: 2.8%. iShares MSCI USA Momentum Factor ETF | Rel. Sharpe 1.30x | Non-mkt beta 2.52%.IWS: 2.5%. iShares Russell Mid-Cap Value ETF | Rel. Sharpe 1.06x | Non-mkt beta 2.17%.
These funds combine a meaningful non-market factor sleeve with backtested relative Sharpe above 1.0. Together they still represent only a minority of beta-near-one ETF capital.
Current snapshot based on the latest US ETF analysis output.

That is the point of the screen: not to reject factor investing, but to distinguish between plain beta, expensive pseudo-differentiation, and the minority of funds whose factor package has actually improved the expected risk-adjusted outcome.

Research disclaimer

These notes are educational research and methodology commentary, not personalized advice or a recommendation to buy, sell, or hold any fund. Use them to sharpen your ETF due diligence, not to skip it.

Keep Exploring

Use the research above as a starting point, then validate the fund in the live data tables: compare it against the current US ETF Leaders or Canadian ETF Leaders, and review the broader US or Canadian universe pages for full factor context.

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Important context

VerifiedBeta publishes educational ETF research, not personalized investment advice, portfolio management, or security recommendations. Funds that screen well here can still be unsuitable for your objectives, taxes, liquidity needs, or constraints. Review fund documents, methodology assumptions, and your own circumstances before acting. See the full disclaimer.