Passive index-based exchange traded funds have allowed investors to cheaply and easily access various markets and assets across the globe, and as the industry matures and evolves, a new breed of smart beta or alternative index-based strategies have quickly gained momentum.
ETF Trends’ recently partnered with Deutsche Asset Management to launch the Deutsche X-trackers Smart Beta Channel, which presents professional insights into the relatively new subset of ETFs to help investors see what makes smart beta “smart.”
Fiona Bassett, Deutsche Asset Management Head of Passive Asset Management for the Americas said, “Our view is that smart beta combines some of the best features of more traditional investment styles: the alpha potential of active investing, the low cost structure of passive funds, and access to the cutting edge tools from some alternative strategies. That’s why we’re delighted to be working with ETF Trends to help bring these approaches to investors’ attention.”
Tom Lydon, ETF Trends Publisher said, “As Smart Beta ETF adoption continues to increase within the financial advisor community, advisors are researching strategy ideas more and more often. We’re thrilled to partner with the Deutsche Asset Management to present today’s best ideas on Smart Beta strategies.”
Exchange traded funds, like the moniker suggests, are funds that are traded on an exchange, allowing investors easy access to a broad portfolio of securities through a simple brokerage account. Traditional beta-index ETFs passively track benchmark market capitalization-weighted indices, like the S&P 500 and the Dow Jones Industrial Average, to name a few of the more popular choices.
However, as the popularity of the ETF investment vehicle grows, more sophisticated investors who are looking beyond traditional beta-index funds have gone to ETF providers, asking for intelligent strategies, similar to actively managed styles, condensed into a cheap ETF wrapper.
Consequently, a new breed of smart beta ETFs were born, combining traditional styles that one would find from active managers with a passive index based structure. Through the marriage of active and passive, we are come out with smart beta ETFs that passively track customized or rules-based indices that specifically target specific factors, such as low volatility, value, dividends, momentum, size, and quality, among others, to potentially enhance returns and diminish portfolio volatility.
Many market observers have quickly categorized this new set of smart beta ETFs as anything that follows customized indices other than established or traditional market capitalization-weighted index funds.
Proponents of smart beta indexing argue that the new indexing methodologies help cover the inefficiencies or risks associated with traditional market cap-weighted methodologies. Specifically, some argue that due to the market cap-weighted indexing methodology, the largest and typically most overbought companies make up the biggest weights, leaving investors at risk to sell-offs in these high flying stocks.
Alternatively, smart beta indexing, some would argue, can potentially help guide investors toward undervalued or underappreciated segments of the market to better drive returns or manage risk exposure.
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.