Excessive enthusiasm for fashionable market segments is not the only cause of poorly diversified indices; U.S. stocks often are over-represented in capitalization-weighted indices, despite their share of the world economy. Over a century ago, railway companies accounted for over 60 percent of the value of the U.S. stock market; today they are less than 1 percent[1]. More recently, Microsoft’s dominance of the tech industry appeared unassailable. With few “sure things,” diversification can offer efficient ways to capture equity opportunities, if investors can avoid taking on unintended bets born from the capital market structure. When using multiple strategies, investors should determine which add diversification, and which pile on the same return and risk types they already have in their portfolios.
5. For the Long Term
Markets can reward and penalize any investment process at any time. But over a full cycle, many smart beta strategies outperform. Investors may be especially keen toward those that offer performance when investors need it most – under large market drawdowns. The performance of smart beta ETFs focused on diversification or targeted investment styles will vary significantly across market regimes. Those that provide greater diversification typically work to buffer the downside like most other well-diversified investments.
6. A Piece of the Puzzle
When implemented well, smart beta ETFs can tactically enhance overall portfolio performance while providing real diversification. They should be used to achieve specific, targeted investment goals. ”
7. Smart Beta is Here to Stay
Smart beta is succeeding because it largely works, in a variety of ways. Understanding how particular approaches perform in various markets can lead to a better understanding of outcomes, which can allow investors to select options that best suit their needs. Only then can investors be smart about smart beta.
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All investments involve risk including possible loss of principal. The views expressed are those of the portfolio managers as of the date indicated, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Diversification does not guarantee a profit or protect against a loss. [1] Source: Credit Suisse Global Investment Returns Yearbook, 2015.