Smart beta, strategic beta, enhanced or factor-based exchange traded fund strategies have quickly gained traction in the investment community as a means to diversify away from the shortcomings of traditional cap-weighted strategies. Nevertheless, investors should carefully weigh the risks and rewards of these smart-beta strategies before diving in.
As a relatively new investment approach in the financial world, smart beta ETFs require some careful considerations before investors should fully commit.
For instance, Deustche Asset Management posed five simple questions that investors should cogitate on when examining factor-based, smart beta strategies: Why should I consider an allocation to these strategies? How do I identify good factors? How do i Decide how many to include? What is a sound methodology for combining factors?
“As an increasingly popular strategy that combines some of the best attributes of the Active, Passive, and Alternative pillars, it warrants careful consideration,” Deutsche Asset Management strategists Robert Bush and Abby Woodham said in a note.
For starters, investors should consider the why. The Deutsche strategists argued that factor investor may sit at the intersection of active, alternative and passive strategies, incorporating the best of the three worlds. The smart-beta ETFs are research driven investments that try to generate alpha or outperformance through cutting edge exposure to specific markets and companies in a systematic rules-based approach that is wrapped in a low-cost fund structure.