Smart Beta Channel

Providing the Right Smart Beta ETF for Investors

Smart beta strategies have quickly hit the scene, but investors need to determine whether or not the options are right for them. To help meet various exchange traded fund investors’ needs, FlexShares outlines their Flexible Indexing as a way to better gauge factor-based investments.

“Flexible indexing takes a fresh approach to delivering investment outcomes,” Shundrawn A. Thomas, Executive Vice President and Head of Funds and Managed Accounts Group at Northern Trust’s Flexshares, said in a research note. “We start with fundamental objectives translated into persistent investment strategies rather than with an existing benchmark. It’s all about our focus: Ours pays very clear attention to the investor and his or her objectives, and also on how to approach risk, viewed by specific and composite risks.”

Specifically, Shundrawn pointed to seven steps that help define the Flexible Indexing methodology: First, focus on the fundamental investor objectives of growing assets, managing risk, generating income and providing liquidity to guide product development. Employ empirical research and analysis to develop an investment strategy with a persistent and measurable outcome. Evaluate how it contributes to portfolio risk and return and to address common investor biases. Consider explicit and implicit costs. Translate the strategy into a rules-based methodology in an investable index. Select the appropriate product structure to deliver the index-based methodology. Lastly, monitor and measure the long-term performance of the product.

“We pursue a clear exposition of our approach known as flexible indexing,” Thomas said. “Our approach produces ETFs that are actively designed yet passively managed. We seek to articulate the established investment concepts and sound investment principles that inform our unique approach to delivering ETF products and solutions.”

Consequently, the FlexShares’ version of smart beta or flexible indexing may also be defined as incorporating traditionally active management styles in a traditional index through a rules-based methodology that is found in an easy-to-use ETF wrapper.

For example, the FlexShares Morningstar U.S. Market Factor Tilt Index Fund (NYSEArca: TILT) tries to provides enhanced exposure to U.S. equities by tilting the portfolio toward long-term growth potential of small-cap and value stocks. By delving deeper than other market index, the underlying benchmark seeks to capture more of the size premium while still avoiding the very bottom of the market that may have illiquidity issues.

For more on Smart Beta ETFs, visit the Smart Beta Channel home page.