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Does the Application of Smart Beta Strategies Enhance Portfolio Performance? The Case of Islamic Equity Investments

Author

Listed:
  • Muhammad Wajid Raza

    (Shaheed Benazir Bhutto University)

  • Dawood Ashraf

    (The Islamic Research and Teaching Institute (IRTI))

Abstract

Traditionally, passive portfolios are structured using an easy to implement market capitalization method albeit highly skewed towards large cap stocks. The introduction of smart beta strategies has allowed passive investors to structure equity portfolios using alternative strategies such as fundamentalweighting, equal-weighting, and low-risk weighting strategies. This paper investigates whether constrained portfolios such as Shari’ah-compliant equity portfolios (SCEPs) can benefit by adopting smart beta strategies. The sample consists of equities from the USA, Canada, Australia, Europe, Middle East, Indonesia, and Malaysia for the period January 2003 to December 2016. The empirical findings suggest that smart beta SCEPs outperform not only conventional market capitalization weighted portfolios but also SCEPs following a market capitalization-weighted strategy. Higher risk-adjusted returns and lower drawdown as a result of following smart beta strategies highlight the importance of considering smart beta portfolio weighting strategies for passive investors. The supremacy of smart beta strategies indicates the value proposition for investors and fund managers alike. We also found that geographical location affects the performance of smart beta SCEPs; countries with a Muslim majority report higher cardinality and lower drawdowns. The results remained robust with alternative Shari’ah screening guidelines and empirical estimation methodology.

Suggested Citation

  • Muhammad Wajid Raza & Dawood Ashraf, 2018. "Does the Application of Smart Beta Strategies Enhance Portfolio Performance? The Case of Islamic Equity Investments," Working Papers 2018-1, The Islamic Research and Teaching Institute (IRTI).
    • Handle: RePEc:ris:irtiwp:2018_001
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    Cited by:

    1. Weiqing Wang & Shuhao Liang & Liukai Wang & Yu Xiong, 2025. "Mixed frequency data and portfolio selection: A novel approach integrating DEA with mixed frequency data sources," Annals of Operations Research, Springer, vol. 347(3), pages 1533-1565, April.
    2. Ashraf, Dawood & Rizwan, Muhammad Suhail & Raza, Muhammad Wajid, 2025. "Does compliance with screening standards affect the performance of firms?," Emerging Markets Review, Elsevier, vol. 65(C).
    3. Paltrinieri, Andrea & Hassan, Mohammad Kabir & Bahoo, Salman & Khan, Ashraf, 2023. "A bibliometric review of sukuk literature," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 897-918.
    4. Pepis, Scott & de Jong, Pieter, 2019. "Effects of Shariah-compliant business practices on long-term financial performance," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 254-267.
    5. Ashraf, Dawood & Rizwan, Muhammad Suhail & Ahmad, Ghufran, 2022. "Islamic equity investments and the COVID-19 pandemic," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    6. Kayani, Umar & Iqbal, Umer & Aysan, Ahmet Faruk & Fianto, Bayu Arie & Rabbani, Mustafa Raza & Hasan, Fakhrul, 2025. "Revealing the secrets of working capital: A comparison between sharia-compliant and conventional firms," Economic Systems, Elsevier, vol. 49(2).
    7. Khan, Abdullah & Rizvi, Syed Aun R. & Ali, Mohsin & Haroon, Omair, 2021. "A survey of Islamic finance research – Influences and influencers," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    8. Reema Monga & Deepti Aggrawal & Jagvinder Singh, 2022. "Exploring new frontiers in indexing strategies: an optimization-based risk-efficient solution," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 13(2), pages 853-865, June.
    9. Fadillah Mansor & M. Ishaq Bhatti & Shafiqur Rahman & Hung Quang Do, 2020. "The Investment Performance of Ethical Equity Funds in Malaysia," JRFM, MDPI, vol. 13(9), pages 1-14, September.
    10. Delle Foglie, Andrea & Panetta, Ida Claudia, 2020. "Islamic stock market versus conventional: Are islamic investing a ‘Safe Haven’ for investors? A systematic literature review," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).

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    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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