How to Build Your Own Smart Beta Portfolio Using Sector ETFs

Over the last decade, many alternative approaches seeking to gain exposure to other factors such as value or low volatility within a specific universe have cropped up. Many of these approaches have been successful both in performance terms and in attracting assets. Consequently, from equal-weighting to factor tilt approaches, the marketplace in smart beta ETFs is getting crowded and difficult to navigate for many investors.

Keeping it simple is often a good approach and investors seeking long-term exposure to equities should consider a significant allocation to smart beta ETFs. Historically smart beta strategies have been able to add around 50 basis points of extra return versus a pure index fund, while still charging low fees, and that can really make a difference over time.

RELATED: Macro-Driven Investing in Sector ETFs

At Hillswick, our approach in managing our S&P 500 Sector Strategy is to use Sector ETFs to construct a portfolio that incorporates our desired factor tilts (smart beta), while also expressing our macro view of the economy. The factor tilts can be seen as providing long-term tailwinds for the portfolio while our macro positioning is a form of short to medium term risk management to avoid turbulence. So instead of just owning the sectors according to their weight in the S&P 500 Index, we weigh them based on both their contribution to our desired factor exposure and on how they fit with our macro outlook.

In the next article on this subject I’ll delve deeper into how to use Sector ETFs to build a macro-driven smart beta portfolio.

Jan Erik Wärneryd is a Senior Portfolio Manager at Hillswick Asset Management, a participant in the ETF Strategist Channel