While the emergence
of smart beta funds is a recent phenomenon, the underlying investment philosophy has been around for decades.
They have also
embraced smart beta funds, which allow them to take advantage of alternative index constructions, or combine passive and active strategies.
Smart
beta Smart beta funds aim to combine the best aspects of passive and active management, aiming to beat the index by eliminating any element of discretionary human judgement.
Those costs are coming down due to
new smart beta funds and will continue to fall as competition increases.
Ask yourself — why does it fit your investment plan better than a plain vanilla index fund or
other smart beta fund?
Investors tend to have three major goals
for smart beta funds: enhancing returns, filling style box allocations and reducing risk.
The majority
of smart beta funds are broadly diversified and hold many hundreds or even thousands of different stocks.
They have also
embraced smart beta funds, which allow them to take advantage of alternative index constructions, or combine passive and active strategies.
Doing a little research: I began a deep dive
into smart beta funds by reviewing the fund managers» experience in ETFs and the financial markets.
By contrast,
smart beta funds with a lot of rules may see a greater number of companies moving in and out of the indexes, which can translate into more buying and selling, and more taxable capital gains for investors.
While a traditional index fund endeavors to passively track an index like the S&P 500,
smart beta funds restrict (or expand) their investment universe in comparison to the benchmark in order to deliver a specific investment goal.
Fixed
income smart beta funds, such as INC, seek to capture these inefficiencies in a rules based and transparent manner.
(Disclosure: The investment firm I work for uses
smart beta funds from Dimensional Fund Advisors with many clients.)
In fact, forty - four per cent of non-market-cap-weighted or smart beta ETF users now
employ smart beta funds in fixed income, and a quarter use smart beta ETFs in commodities.
The authors present compelling empirical evidence that
smart beta funds outperform active, passive, and factor funds on a net - of - fees - and - taxes basis.
The Guggenheim S&P 500 (RSP) is an equal weighted index fund and one of the
first smart beta funds (find out more here).
All of the well - established factors to which investors gain exposure in low -
cost smart beta funds are expected to deliver a premium in the long run, but none is guaranteed to outperform at all times.
Sure external factors do
affect smart beta funds, but even in the backtest of the funds index external factors are at play.
With all the marketing hype around Smart Beta, and the radically varying strategies (and shit) lumped into the Smart Beta category, I can't even imagine how many investors get roped
into Smart Beta funds that they know nothing absolutely about.
Look Before You Leap The advantages associated with systematic factor investing, such as low costs and transparency, have driven rapid growth in the number
of smart beta funds.
There is over $ 420 billion
in smart beta funds, but that's a drop in the bucket considering the global market cap of the world's stock markets is something like $ 70 trillion.
Smart beta funds are generally more expensive than a passive, market cap weighted index fund, but less expensive than a full actively managed fund.
Many of these new ETFs are
smart beta funds, a growing and increasingly competitive segment of the ETF universe.
Much like
the smart beta funds that have grown in popularity in equity markets, INC seeks to improve risk adjusted returns in a transparent, rules - based, low - cost way.
Smart beta funds may be cheaper than active mutual funds, but they can still be half to three - quarters of a percentage point more expensive than traditional ETFs.
Active managers have long had a difficult time beating the markets over most time periods; it's possible that
smart beta funds could have similar difficulty.
That difference in fees can put
the smart beta fund at an immediate disadvantage.
Among those who have invested in non-market-cap-weighted or
smart beta funds, four in five use multi-factor ETFs, three - quarters use equal - weighted ETFs, 70 per cent use minimum volatility ETFs and 56 per cent employ single - factor ETFs.
Among all funds in the 1993 — 2017 period, for example,
smart beta funds» results net of fees and postliquidation taxes fell short of their benchmark returns by 0.9 %, compared to − 3.5 %, − 1.7 %, and − 2.8 % for active, passive, and factor funds, respectively.
For
the smart beta funds with expense ratios under 100 bps, the frequency distribution of fund expenses is almost indistinguishable from that of the passive index funds.
Finally,
smart beta funds also benefited from their substantial use of ETFs, an investment vehicle that did not exist 25 years ago.
Using Morningstar's categorization to group active and passive funds, and keywords to form baskets of factor and
smart beta funds, the authors successively calculate rates of return gross of fees, net of fees, after taxes but before liquidation, and after taxes post liquidation.
I can't even imagine how many investors get roped into
Smart Beta funds that they know nothing absolutely about.