As investors search for ways to navigate an extended bull market environment, more are turning to smart beta strategies, one of the fastest growing areas of the exchange traded fund universe.
“Smart beta ETFs use a different lens than traditional index products, focusing on stocks or bonds that have potentially attractive and intuitive characteristics like low volatility, dividend yield or company quality,” according to a BlackRock iShares research note. “This approach can help investors pursue desired outcomes like staying invested through volatile markets or seeking higher income.”
The new breed of smart beta indexed-based ETFs are also seen as a perfect marriage of active and passive strategies, as these alternative index-based ETFs incorporate some of the most widely used actively managed styles in a carefully crafted, rules-based indexing methodology.
“Smart beta ETFs sit at the intersection of active and index investing, incorporating elements of both,” according to iShares.
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.