Smart beta defines a set of investment strategies that emphasize the use of
alternative index construction rules to traditional market capitalization based indices.
Due to continual monetary inflation in the fiat money system and the «survivor bias» inherent in stock
market index construction, nominal stock prices are rising 67 % of the time.
By education, I specifically mean that we are in the position to share with you
how index construction and other index rules and characteristics matter to the ETF tracking them.
Smart beta refers to a methodology
of index construction that seeks to achieve better risk - adjusted returns compared to traditional market capitalization weighted benchmark indices.
I'm not an expert
on index construction, but I didn't see anything in the index rules or factsheet that indicates otherwise.
My colleague, David Blitzer, is
discussing index construction in his blog series «Inside the S&P 500», and so far has reviewed selecting stocks and the float adjustment.
Indices Are Not Passive Because indices are, to varying degrees, incomplete market portfolios,
index construction amounts to active management.2 Providers choose index holdings by size, liquidity, sector, geography, profitability, and the like.
LibertyQ ETFs utilize a rules - based investing methodology
of index construction, which tracks an underlying index, and seeks to achieve better risk - adjusted returns compared to traditional market cap weighted indices.
While
the index construction principles of transparency, liquidity, and systematic rules - based methodologies are widely similar between equities, commodities and other asset classes, there are details that distinguish the asset classes.
It turns out that wasn't quite fair: XTF president Barry Gordon contacted me and explained that
the index construction rules are indeed fully transparent, and although they were not on the XTF website at the time, they are now.
Is the expectation that investors have to track the minutae of
index construction and behaviour?
Based on
the index construction and the risk / return profiles, we can conclude that the two value indices serve different purposes for the investment community.
Index investing has been going through an evolution in recent years, particularly with the emergence of advanced approaches to
index construction, known as strategic beta.
The Index construction process looks beyond just yield and analyzes the financial health of a company and its ability to maintain dividend increases by including a blend of historical and forward looking factors to screen for high quality dividend - growers.
The index construction process sorts the companies into categories based on their exposure to blockchain technology and selects only those companies which are actively investing resources into products or services that use blockchain technology.
Index construction methodologies may seem arcane, but their effects are far from inconsequential.
Bay Street's response to the Nortel fiasco of contracting out
the index construction to S&P now seems like an impending loss in value for those indexed or «closet indexed» to the S&P TSX index.
This is a result of
index construction, because financials trade at relatively low multiples of book value.
While
this index construction technique has existed for many years and is widely practiced, it is less understood that the stocks in the middle, or blend basket, are assigned to both the growth and value indices.
Strategic beta refers to a methodology of
index construction that seeks to achieve better risk - adjusted returns compared to traditional market capitalization weighted benchmark indices.