By Larry Whistler via

When employing core/satellite investment strategies, investors often focus only on low-cost market cap-weighted indices when constructing the core, or strategic, allocation of the portfolio in order not to stray too far from an established benchmark. A willingness to explore non-cap weighted indices, or strategic beta, can often prove valuable in establishing a less volatile, more consistent return profile in the heart of the portfolio.

So-called “strategic-beta” exchange-traded funds (ETF’s) can be loosely defined as any ETF that doesn’t track a market-cap weighted benchmark.  Typically, the ETF’s are built around some factor – value, quality, momentum, size or low volatility – or some combination of factors.  These ETF’s typically follow a rules-based process for security selection, and often will exhibit very different return profiles than standard market-cap weighted indices.

At the heart of strategic-beta is an adherence to a factor, or combination of factors, with security selection designed to focus on those companies, or groups of companies that best exhibit this specific trait.  For example, low-volatility, or minimum-variance portfolio ETF’s, have exhibited unique return profiles over time versus standard market-cap weighted indices, capturing roughly 85-90% of the cap-weighted indices’ upside, and only 70-75% of the downside.

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