Instead of investing with market-capitalization weighted indices that typically overweight expensive stocks while under-weighting cheaper companies, investors can use exchange traded funds to access customized, smart-beta indices that capture market mispricings.
In the upcoming webcast, Innovations in Indexing: Constructing Global Portfolios with Smart Beta ETFs, Luciano Siracusano, Chief Investment Strategist and Head of Sales at WisdomTree, talks smart-beta strategies and how alternative indexing methodologies can change the nature of an ETF investment.
Smart beta strategies are a type of play on the two dominant investment styles: beta or passive tracking, and alpha or actively seeking out-performance. In essence, the smart-beta index follows an actively managed style and incorporates the rules-based investment strategy into a passive index that adhere to the strategy through weighting and rebalancing.
Indices that track various smart-beta methodologies have become a popular alternative to market-capitalization indexing. Many observers have noted that the markets are not efficient. Overvalued stocks typically have more capitalization while companies that are undervalued tend to have less capitalization. Consequently, a cap-weighted methodology, like most index funds, tend to be heavy on overvalued stocks and underallocate undervalued stocks.
The alternative indexing methodology seems to be working out for the new breed of funds as many smart-beta ETFs have garnered four- or five-star ratings from Morningstar due to their more attractive risk-adjusted returns. According to Morningstar analyst Michael Rawson, smart-beta ETFs have on average received higher Morningstar rankings than traditional equity fund category. [Some Strategic Beta ETFs Shine Bright]