Exchange traded funds (ETFs) that implement smart-beta strategies help investors move away from traditional market-cap methodologies to generate better returns without paying for the high costs associated with an active manager.

On a recent webcast, How Smart Beta is Getting Smarter and Why Advisors Should Pay Attention, Eric Shirbini, Global Product Specialist at ERI Scientific Beta, highlighted some shortcomings associated with market cap-weighted index funds, including a tilt toward unrewarded factors and low level of diversification, which may lead to less desirable risk-adjusted returns.

Consequently, fund providers have worked with indexers to create smart-beta indices to address the problems. In the beginning, we saw so-called smart-beta 1.0 solutions, or strategies with a single factor tilt, like value or equal weight. Now, the industry has come out with smart-beta “2.0” indices that utilize factors based on well established empirically rewarded factors and multi-weighting strategies that weight components to maximize diversification.

“Many rewarded factors are under-represented in client portfolios,” Joe Smith, Senior Market Strategist at, CLS Investments, said.

For instance, on the webcast, 63% of polled advisors are not allocated toward smart-beta strategies. However, the majority of advisors, 56%, say they are adding smart-beta ETF exposure over the next six months. About 27% of surveyed advisors, though, require more information, which reflects the ongoing need to educate investors about alternative index-based strategies.

Smith advised investors to focus on long-term, rewarded sources of risk while minimizing exposure to unrewarded risks as a way to steer toward broad and consistent drivers of superior returns.


Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.