Performance of the Low Beta-to-ETF Strategy After ETF Selloffs

Abstract

This thesis investigates whether using the low beta-to-ETF measure introduced by Lynch, Page, Panariello & Giroux (2019) after high volume ETF selloffs produce investors abnormal returns on a short-term and long-term basis. This low beta-to-ETF strategy aims to capture the so-called ETF outsider stocks that are unintentionally co-moving with the rest of the ETF constituents. The key motivation is that the investors should buy these outsiders after a downward price-pressure from a selloff event and then capture the price reversion after the situation normalizes.

By applying Lynch et al. (2019) methodology, a set of both U.S. and European broad-index and factor ETFs are examined for selloff days from 01/2016 to 08/2020. Overall, 202 outsider ETF constituent portfolios are created, which are then each held for 40 days. These portfolios are then combined into long-term systematic strategies for each ETF and are backtested for the entirety of the sample period and estimated with the Fama-French Five-factor model with betting against beta expansion. Additionally, a fundamental proxy component of Piotroski F-Score is suggested to enhance stock-picking for the portfolios, as Lynch et al. (2019) discussed the benefits of applying fundamental analysis for their strategy.

The results of this thesis indicate that short-term outsider stock strategy for these sample ETFs produces an average cumulative abnormal return of 1.3% after a 40-day holding period. The long-term systematic strategy fails to generate statistically significant alpha estimated by the Fama-French Five-factor model but produces superior Sharpe ratios and reduces volatility compared to just passively holding the parent ETFs. Finally, the fundamental proxy suggested as an enhancing stock-picking factor does not improve the abnormal returns obtained in this thesis.