It Pays to Look Under the Hood of Smart Beta Funds

Whether it’s lower fees or simply understanding something that sounds outright complicated, smart beta funds are gaining more traction with investors. That doesn’t mean investors can blindly pick a smart beta fund and expect to generate market-beating performance out of the box, so it pays to to exercise due diligence by taking a closer look under the hood of these funds.

By no means do investors need to strive to become market experts, having a general understanding of a fund’s strategy is essential.

“A lot of factor-based funds have similar names,” Suzanne McGee wrote in Morningstar. “But they can be very different for the reasons described above. As such, smart investors will do their homework to understand exactly what they are getting.

Furthermore, fund information should be readily available via a prospectus. It’s akin to a looking at a vehicle’s maintenance history when purchasing a used car.

“In today’s competitive marketplace, fund firms should be able to give a quick summary of how their product differs from its peers in terms of construction and methodology,” McGee noted. “If that isn’t clear in the prospectus, or in other investor communications such as quarterly reports, well, that’s a red flag.”

“Among other things, the fund firm should make clear how often the fund rebalances its holdings — which can drive up expenses — and whether there is a provision that might allow a manager to override the rules that govern the fund’s operation most of the time — which could turn the fund into something the investor wasn’t expecting,” McGee added.

Smart Beta Funds Gathering More Assets

As ETFs get longer in the tooth, more investors are understanding how certain strategies work, especially when it comes to smart beta funds—as evidenced by the latest data by ETFGI that these products gathered $9.72 billion in assets globally during the month of November.

“ETFGI, a leading independent research and consultancy firm covering trends in the global ETFs/ETPs ecosystem, reported today that equity-based Smart Beta ETFs and ETPs listed globally gathered net inflows of US$9.72 billion during November,” a Nasdaq report noted. “Year-to-date through to the end of November 2019, Smart Beta Equity ETF/ETP assets have increased by 35.1% from US$618 billion to US$835 billion, with a 5-year CAGR of 19.9%, according to ETFGI’s November 2019 ETFs and ETPs Smart Beta industry landscape insights report, an annual paid-for research subscription service.”

“At the end of November 2019, there were 1,351 smart beta equity ETFs/ETPs, with 2,530 listings, assets of $835 billion, from 167 providers on 41 exchanges in 33 countries,” the report added. “Following net inflows of $9.72 billion and market moves during the month, assets invested in Smart Beta ETFs/ETPs listed globally increased by 4%, from $803 billion at the end of October 2019 to $835 billion.”

For more market trends, visit ETF Trends.