Smart beta or customized index-based exchange traded funds have been quickly gaining traction as an alternative to any shortcomings of traditional market capitalization-weighted index funds, attracting billions of dollars this year.
Smart beta ETFs have seen $45 billion in net inflows globally year-to-date and are on course for a record year, compared to the $30 billion added for all of 2015, writes Andrew Ang, Head of Factor Based Investing Strategies at BlackRock, in a note.
Supporting the ongoing growth in smart beta strategies, factors such as quality, momentum, value, size and minimum volatility have been drivers of returns across asset classes and helped shore up shortcomings of traditional market cap-weighted index funds.
“Because they are driven by different economic rationales, they have tended to outperform at different times,” Ang said. “For investors with a shorter time horizon and a reasonable appetite for risk, this cyclicality presents an opportunity to tilt portfolios towards one factor versus another in pursuit of incremental returns.”[related_stories]
Given the current market environment, Ang suggested that investors should underweight quality, remain neutral weight on size, value and minimum volatility, and overweight momentum.