Note: This article is courtesy of Iris.xyz
Smart Beta ETF’s have captured the imaginations of the investing public over the past five years, growing to more than 440 ETF’s and over $450 billion in assets, according to Morningstar. The growth in names and assets suggests that financial advisors and investors find some value in these strategies. The question that needs to be asked is, “By itself, is this a winning strategy?”
What is Smart Beta?
While traditional indexes consist of a list of securities weighted by overall size, some people have concluded that this weighting presents an advantage for large securities and a disadvantage for small securities. Many investors have concluded that this inequity must create exploitable inefficiencies within the market, bringing about the growth of Smart Beta. Smart Beta strategies involve researching and investing in a specific subset of the overall market that exhibits common attributes. The expectation of Smart Beta strategies is that those shared attributes will produce an investment return superior to the traditional weight-based index discussed above.
The concept of Smart Beta strategies is not new to the investment world. Professors Eugene Fama and Kenneth French of the University of Chicago Booth School of Business identified the predictive capacities of certain common factors exhibited within the companies that compose the public markets. They initially ranked companies according to three characteristics: company size, valuation, and price momentum.
Little has changed in the almost 25 years since Fama and French published their first paper on the topic; these three characteristics remain the primary drivers of most Smart Beta strategies. However, one change has been made: Quality was added as a factor to round out the offering.
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