The relatively nascent exchange traded fund industry is still evolving, with money managers and providers coming out with increasingly more sophisticated smart-beta, index-based strategies that could provide better risk-adjusted returns than traditional beta-index funds.
On the upcoming webcast, The Evolution of Smart Beta 2.0, Alexander Channing, Director of Quantitative Cross Asset Index Strategies at ETF Securities, and Mike Cameron, Head of Institutional Sales at ETF Securities, detail the ongoing evolution of smart-beta ETF strategies and how advisors can capitalize on the new developments.
ETF Securities sees that the industry is developing smart-beta “2.0” indices as money managers and fund companies try to enhance broad exposure.
Originally, investors have relied upon market cap-weighted indices for their passive investment needs. However, these traditional beta indices were not designed to maximize investment risk versus returns. Instead, observers have pointed out that market cap-weighted indices may overexpose investors to outperforming stocks since these are the same companies that have seen their market cap grow.
After a while, smart-beta “1.0” indices came along to provide superior risk-adjusted performances, but they did not adequately address two drawbacks in market-cap weighted portfolios: a tilt toward unrewarded risk factors and lack of diversification, according to ETF Securities.
Now, we are seeing a growth spurt in the ETF space as more smart-beta 2.0 index-based funds come out. These ETFs track multi-factor indexing methodologies that rely on multiple empirically rewarded factors and multi-weighting strategies to potentially diminish risk and enhance returns.
ETF Securities has partnered with ERI Scientific Beta on the new ETFs, including the ETFS Diversified-Factor U.S. Large Cap Index Fund (NYSEArca: SBUS) and ETFS Diversified-Factor Developed Europe Index Fund (NYSEArca: SBEU), which launched in January. Scientific Beta is an index provider specializing in smart beta solutions and is part of the EDHEC Risk Institute, an entity that works closely with institutions to implement academic research and improve their investment and risk management process has also recently came out with smart-beta ETFs of its own. [ETF Securities Expands Equity ETF Lineup With Two More New Funds]
The two ETFs’ selection process includes emphasizing investment factors, such as volatility, valuation, momentum and size.
Additionally, the ETFS Diversified-Factor U.S. Large Cap Index Fund and ETFS Diversified-Factor Developed Europe Index use a proprietary weighting strategy to provide well diversified exposure, by combining 5 models: Maximum Deconcentration, Maximum Decorrelation, Efficient Minimum Volatility, Efficient Maximum Sharpe Ratio, and Diversified Risk Weighted.
Financial advisors who are interested in learning more about alternative, smart-beta index ETFs can register for the Wednesday, November 18 webcast here.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.