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]
Investors are also taking a shine to smart-beta ETFs. Smart beta ETFs contributed a record $65.1bn of inflows in 2013 led by dividend-weighted funds, and nearly doubled the $34.2bn from last year, according to BlackRock Data. [Smart Beta ETFs Grow, Gain Naysayers]
“A study conducted by Cogent Research, a division of Market Strategies International, indicates that more than half (53%) of institutional decision makers will increase their use of smart beta ETFs over the next three years—that’s more than any other ETF category, including market cap-weighted ETFs (48%),” according to WisdomTree.
For more information on strategic- or smart-beta indices, visit our indexing category.
Financial advisors who are interested in learning more about smart-beta, index-based ETFs can register for the Tuesday, September 9 webcast here.