“It all looks and sounds good on paper, but the guarantee is that it is going to cost you more money, you are going to take more risk, and you can underperform for a long time,” Rick Ferri, founder of Portfolio Solutions LLC, said in the article.
In comparison, traditional benchmarks, like the S&P 500, are size-weighted, so large companies like Apple (NasdaqGS: AAPL) and Exxon Mobile (NYSE: XOM) have a heavy influence on the direction of the index. [Smart Beta Boom]
“When you dig down, smart beta adds value because they don’t weigh on price,” Rob Arnott, founder of Research Affiliates, said in the article. “They don’t reward a company just for having a higher price, and that is where the central source of value added for every segment of smart beta space lies.”
The value added can translate to better portfolio returns over long periods. According to Towers Watson & Co, smart-beta strategies that select stocks based on small daily prices swings, utilize a diversification component, track companies based on fundamentals and equally weight holdings have outperformed capitalization-weighted indices over the past five decades. [Indexology: Incorporating Smart Beta Strategies in Asset Allocation]
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Max Chen contributed to this article.