While smart-beta index-based exchange traded funds are beginning to gain a wider following, the indexing methodology and investment strategies are still somewhat of a black box. Consequently, there is still an urgent need to educate investors on the relatively new products.
On the recent Multi-Factor Index Investing webcast, Scott Conlon, portfolio strategist for State Street Global Advisors, David Mazza, Head of ETF Investment Strategy at SSgA, and Dimitris Melas, managing Director and Global Head of New Product Research at MSCI, provided the lay of the land on smart-beta, or advanced-beta, index ETF investments that utilize multiple factors to select component holdings.
In a survey of financial advisors conducted by ETF Trends and RIA Database, respondents revealed that there was some interest in the advanced beta strategies, but the majority “still need to do more research.” [Institutional Investors, RIAs Warming Up to Smart-Beta ETFs]
The greater need for information is understandable as the newer indices are vastly different from traditional beta indices. The new breed of smart-beta funds still passively track a benchmark index, but the index itself employs actively managed styles. Specifically, indexers focus on specific factors to select component stocks.
“Over long observation periods, these factors have shown potential for excess return with attractive risk-adjusted performance, reduced volatility, better downside protection as evident by drawdown measures and higher tracking error due to cyclicality of factor performance,” Conlon said.
The factors can be implemented to craft customized advanced-beta indices that go beyond traditional market capitalization-weighted indexing. For instance, Mazza pointed to SSgA’s recently launched suite of “Quality Mix” ETFs, including broad market ETFs like the SPDR MSCI World Quality Mix ETF (NYSEArca: QWLD), SPDR MSCI EAFE Quality Mix ETF (NYSEArca: QEFA) and SPDR MSCI Emerging Markets Quality Mix ETF (NYSEArca: QEMM). [A Quality Cocktail With This New ETF]
Additionally, the provider launched a country-specific ETFs with the quality-factor, including the SPDR MSCI Australia Quality Mix ETF (NYSEArca: QAUS), SPDR MSCI Canada Quality Mix ETF (NYSEArca: QCAN), SPDR MSCI Germany Quality Mix ETF (NYSEArca: QDEU), SPDR MSCI Japan Quality Mix ETF (NYSEArca: QJPN), SPDR MSCI Spain Quality Mix ETF (NYSEArca: QESP) and SPDR MSCI United Kingdom Quality Mix ETF (NYSEArca: QGBR). [State Street Takes Quality Approach to Country ETFs]
Melas points out that the quality mix methodology provides three key benefits: The index emphasizes quality, value and low volatility stocks that have historically outperformed the market over the long-term; provides a more equal weight approach to diminish concentration; and creates broad market exposure and diversification.
For more information on smart-beta indices, visit our indexing category.
Financial advisors who are interested in learning more about multi-factor index investments can register to view the webcast here on demand.