More Advisors Need to Know Who's at the Helm of Smart Beta Funds

With trade wars putting U.S.-China trade deal negotiations in limbo, investors are seeing volatility return to the markets. The latest market movements emphasize the need for smart beta strategies–an extension of the overarching theme for investors to get strategic in 2019, but there’s one problem–a majority of advisors are unaware who’s at the helm of these smart beta strategies.

In a quantitative online study of almost 300 advisors, Columbia Threadneedle Investments found that 98 percent of the respondents said they had “some level of familiarity with strategic beta investing.” However, only 36 percent were confident with incorporating strategic or smart beta strategies into portfolios.

Furthermore, only 18 percent of advisors knew who were running these smart beta funds. One investment firm is making a call to action for these advisors–don’t ask “What?”–ask “Who?”

“One of our biggest problems is people don’t understand what they are investing in,” Marc Zeitoun of Columbia Threadneedle Investments told ThinkAdvisor on at the Morningstar Conference in Chicago. “What I would like people to react to is, who is managing the money?”

Quick Primer on Smart Beta

Now on to the investors–what exactly is smart beta? It can be best explained from the experts who deep-dive into the field.

“Smart beta, also called factor investing, is rooted in academic research from Eugene Fama, a professor at the University of Chicago’s Booth School of Business, and Ken French, a finance professor at the Tuck School of Business at Dartmouth College,” wrote Debbie Carlson in U.S. News. “They found certain investment factors such as a company’s size, a firm’s price-to-book ratio and market risk would over time outperform the broader S&P 500 index.”

With the gist of smart beta in mind, investors must now understand exactly how they help during times of market volatility. This is essential given that investors nowadays prefer to have this downside protection built in to ETF products.

“It’s like a hedge strategy,” said Kip Meadows, founder and CEO of Nottingham, a fund administration firm and white-label ETF issuer in Rocky Mount, North Carolina. “If you have a downturn, the theory is the company that has the better fundamentals, like a higher dividend, it should outperform and provide investors protection.”

However, investors don’t have to assume more risk in order to ferret out the most profitable opportunities. Smart beta strategies can help limit the downside in market drawdowns and capture gains when markets are in an upswing.

Additionally, investors want this feature at a low cost.

Smart Beta Examples

To differentiate themselves in an ETF environment that is putting lower costs at the forefront, Columbia Threadneedle Investments cut its management fee on two ETFs: the Columbia Multi-Sector Municipal Income ETF (NYSEArca: MUST) to 0.23% from 0.28% and Columbia EM Core ex-China ETF (NYSEArca: XCEM) to 0.16% from 0.35%.

MUST could help complement a traditional approach to municipal bond investing and improve investor outcomes. The smart beta methodology leans toward potential opportunity as opposed to traditional market cap-weighting or indebtedness. As a result, the portfolio takes a more active approach to enhance yield and generate improved risk-adjusted returns over conventional municipal benchmarks while following a passive, rules-based indexing methodology.

Meanwhile, XCEM helps investors gain broad exposure to the emerging economies but specifically excludes Chinese equities in case investors wary of the potential risks associated with this emerging Asian market.

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