Once the smart beta ETF selection process is whittled down, investors should think about how the allocation would impact their overall risk profile. A smart beta ETF should help enhance overall returns while improving diversification, lower correlation between other investment holdings and reduce risks.
Next, one should consider if the allocation negatively impacts the overall fee budge of the portfolio. If the strategy offers potential alpha, it should do so at a relatively cheaper cost to comparable active strategies that aim to also deliver similar returns.
Lastly, Victory Capital argued that investors should conduct manager due diligence to see if the people behind the strategy have experience managing products based on a rules-based indexing approach.
Victory Capital also offers its own suite of smart beta ETFs that focus on volatility-based weighting methodology to potentially help investors generate improved risk-adjusted returns. For instance, the VictoryShares US 500 Enhanced Volatility Wtd ETF (CFO), VictoryShares US EQ Income Enhanced Volatility Wtd ETF (CDC) and VictoryShares US 500 Volatility Wtd ETF (CFA) start with the broad market and screens for companies with four quarters of positive earnings. Those stocks are then weighted based on their standard deviation over the past 180 trading days. Stocks with lower volatility are given higher weightings and stocks with greater volatility are given lower weightings. Ultimately, all securities that pass the earnings criteria are present, just at different weights.
For more on smart beta ETFs, visit our Smart Beta Channel.