Smart Beta Strategies: the Social Responsibility of Investment Universes Does Matter

In this article we extend the research on smart beta strategies by exploring how using an SRI universe impacts the properties of smart beta portfolios. We focus on four smart beta strategies: the Equally Weighted (EW), the Most Diversified Portfolio (MDP), the Minimum Variance (MV) and the Equal Risk Contribution (ERC). Using dierent estimators of the matrix of covariances, we apply these strategies to the EuroStoxx universe of stocks, the ASPI and the complement of the ASPI in the EuroStoxx universe from March 15, 2002 to May 1, 2012. We show that smart beta strategies, built on the entire universe, concentrate their solution on non-SRI stocks. Consequently, the portfolios built on the ASPI are more diversified and, tend to have higher turnover. In addition, their tracking error against EuroStoxx, is smaller than those of their respective counterparts built on the two other universes, and their distribution of returns has positive skewness, while those of portfolios built on the two other universes have negative skewness. Consistent with the empirical literature, all the smart beta portfolios built on the ASPI universe in our sample outperform the CW portfolio.