Consequently, smart beta ETF generally come with low costs, are transparent like index strategies, can be a source of incremental return, help manage risk and create desired outcome, like dampening volatility or pursing higher income.
BlackRock’s iShares believes that there are three ways investors are using smart beta ETFs to achieve their investment goals: First, lower volatility can help investors stick with their plans and lower risk exposure. Dividend-paying strategies help meet income needs. Lastly, factor strategies can enhance returns.
Most investors stick to riskier equities as a means to steadily growth wealth, but market volatility can unnerve the most steadfast investor, potentially causing some to abandon their plans and potentially put their long-term goals at risk. Alternatively, smart beta ETF strategies, like low volatility-focused factor investments, may help diminish drawdowns during periods of wide market swings and still help investors capture any potential upside.
Dividend-focused indexing methodologies may help address challenges when facing a low-yield environment and an extended bull market. Dividend yields may be an attractive alternative relative to bond yield, which are near record lows. As a way to avoid the high yield trap, investors can also hone in on dividend growth stocks that are more fiscally disciplined and provide a sense of quality.
Lastly, factor-based strategies can help enhance returns. Academic research have sown that historic stock performance are driven by qualities like strong balance sheets, low relative price multiples, small company size and companies on a price upswing. By screening specifically for these academically proven factors, smart beta ETFs may also help investors capture companies with outperforming characteristics.