Do your Smart Betas have too much overlap or too little?

After doing your research on Smart Beta strategies, you now have six better ways to build a large /intermediate cap US equity portfolio than using a cap-weighted index: Equal-weighted, Minimum Volatility, Quality, Value, Momentum and High Dividend Yield.

How do you put them together in a portfolio?

1. Analyze and estimate their risks (tracking errors vs cap-weighted)
2. Make an assumption about excess return in exchange for tracking error, or information ratio (0.25?)
3. Analyze and estimate their correlations:
   1. High positive correlations:
      1. 0.75 Minimum Volatility and High Dividend Yield
      2. 0.70 Value and High Dividend Yield
      3. 0.40 Minimum Volatility and Value
   2. High negative correlations
      1. 0.60 Value and Quality
      2. 0.50 Equal-weighted and Quality
      3. 0.40 Equal-weighted and Minimum Volatility
      4. 0.30 High Dividend Yield and Equal-weighted
      5. 0.30 Value and Momentum

Observations

1. High correlation Smart Betas have overlapping holdings/exposures
2. Low correlation Smart Betas offer diversification potential

Steps

1. Minimize high correlation and maximize low correlation
2. Reduce portfolio tracking error to 1.3% using 4% to 6.5% risk smart betas
3. Combine 0.25 IR Smart Betas to make a 0.92 IR portfolio

Questions

1. The Smart Beta portfolio in the slide has a tracking error of 1.3%.  If we find more low correlation Smart Betas to add, how low can we take the tracking error?
2. Is the Smart Beta portfolio turning into an expensive cap-weighted index?
3. Can the Smart Beta portfolio still have excess return if its tilts net to the cap-weighted index?