With U.S.-China trade deal negotiations in limbo and now the U.S. turning to Mexico in the latest tariff wars, investors are seeing more volatility dominate the markets. The latest market movements emphasize the need for smart beta strategies–an extension of the overarching theme for investors to get strategic in 2019.
Why get strategic in 2019? One only has to look back to the last quarter of 2018 to know the reason why–the Dow Jones Industrial Average fell 5.6 percent, while the S&P 500 was down 6.2 percent and the Nasdaq Composite declined 4 percent.
All in all, 2018 marked the worst year for stocks since 2008 and only the second year the Dow and S&P 500 fell in the past decade. That same volatility made a return in May as U.S.-China trade negotiations took a turn for the worse.
What investors are feeling in terms of their sentiment when it comes to the current market landscape doesn’t necessarily correlate to what the data suggests. This dichotomy was certainly evident in the fourth quarter of 2018 when the capital markets were racked by a heavy dose of volatility.
But what exactly is smart beta?
“Smart beta, also called factor investing, is rooted in academic research from Eugene Fama, a professor at the University of Chicago’s Booth School of Business, and Ken French, a finance professor at the Tuck School of Business at Dartmouth College,” wrote Debbie Carlson in U.S. News. “They found certain investment factors such as a company’s size, a firm’s price-to-book ratio and market risk would over time outperform the broader S&P 500 index.”
With the gist of smart beta in mind, investors must now understand exactly how they help during times of market volatility. This is essential given that investors nowadays prefer to have this downside protection built in to ETF products.
“It’s like a hedge strategy,” said Kip Meadows, founder and CEO of Nottingham, a fund administration firm and white-label ETF issuer in Rocky Mount, North Carolina. “If you have a downturn, the theory is the company that has the better fundamentals, like a higher dividend, it should outperform and provide investors protection.”
So which sectors saw the most activity when it came to smart beta ETFs? It seems investors have a penchant for master limited partnerships (MLPs), biotech, volatility minimization, and India.
In terms of sheer volume, below are the most active top 5 smart beta ETFs thus far in 2019:
| Symbol | ETF Name | Asset Class | Total Assets ($MM) | YTD | Avg Volume |
| AMLP | Alerian MLP ETF | Equity | $8,565.97 | 15.11% | 13,695,439.00 |
| XBI | SPDR S&P Biotech ETF | Equity | $4,009.71 | 12.66% | 5,267,659.00 |
| USMV | iShares Edge MSCI Min Vol USA ETF | Equity | $26,395.74 | 13.68% | 3,445,728.00 |
| SPLV | Invesco S&P 500® Low Volatility ETF | Equity | $10,790.06 | 15.03% | 2,560,175.00 |
| EPI | WisdomTree India Earnings Fund | Equity | $1,383.66 | 6.57% | 1,763,556.00 |
For more relative market trends, visit ETFtrends.com.