“If what you want to diversify into is expensive, at least average in over a course of a few years or maybe just defer it a year or two and see how the valuation looks then,” Arnott said. “So all we said was valuation matters.”
Related: Smart-Beta ETFs Take Center Stage
Moreover, Arnott’s research has also found that valuations metrics on smart-beta international market strategies are also revealing similar patterns.
“Several of these so-called smart beta ideas are trading rich, they’re liable to disappoint,” Arnott said. “If somebody buys something that has outperformed by 5% a year for the last decade, they’re expecting it to outperform by 5% a year. Well, if it outperformed just by dint of getting more expensive, watch out – it may mean-revert and give you a negative alpha, that’s what I meant by smart beta going horribly wrong.”
For more information on alternative index-based strategies, visit our smart-beta category.