The last couple of months have been a rocky ride for investors as the U.S.-China trade war took them to new heights of volatility, including the largest decline of the year in the Dow Jones Industrial Average. However, certain smart beta ETFs have been head and shoulders amid the proverbial volatility roller coaster.
Smart beta ETFs offer investors a different look as opposed to the run-of-the-mill passive index strategy and with the latest market volatility, investors may want to reconsider adding more value as opposed to growth in their portfolios.
A market-capitalization-weighted index provides clients with exposure to a particular market based on security prices, without considering any true company fundamental to judge its value. However, the Great Recession of 2008 roiled investors with deep declines that they were not anticipating, as a result of overexposure to potentially overpriced stocks relative to their true value.
Shifting To Smart Beta Strategies
As such, things began to change, with many financial advisors shifting to smart beta strategies in the past 10 years. The first aspect to touch upon was the limitations of a market-cap-weighted index, which would then warrant the need for smart beta and factor strategies.
Given certain market conditions, investors need more than just a passive index that goes beyond a one-size-fits-all template that uses market cap weighting. While these indexes provided simple, low-cost solutions, the need for even greater scrutiny is necessary in the quest for more alpha —a case for smart beta.
Through smart beta, investors get adaptable exposure with the rules-based approach in conjunction with reaping the rewards of diversification via access to a broad market index. In addition, the simplicity of buying a broad-based market index has a concentration of risk, and should a market correction ensure comparable to that witnessed in the fourth quarter, investors are left vulnerable.
As such, smart beta strategies can be segmented into alternatively weighted, single-factor and multi-factor strategies–the latter to diversify concentration in a specific factor–low or minimum volatility, momentum, size, quality, yield, and value.
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