When stepping into the investment markets, investors usually consider either actively managed funds backed by a team of experts or passive products that simply track a benchmark index. However, with smart beta exchange traded funds, investors can do both.
“The strategic/smart beta category has grown rapidly for its potential to deliver on the coveted benefits of skilled active management, primarily alpha1 generation and risk reduction, but in a wrapper that also has some of the attractive attributes of passive approaches, not the least of which are low relative costs,” according to a Victory Capital research paper titled, Life isn’t binary. Neither is your portfolio.
Strategic beta or smart beta refers to a group of indices and tries to provide an alternative to traditional market-cap weighting methodologies, often incorporating investment styles traditionally associated with actively managed funds.
As investors consider various active or passive strategies, they may look to three primary drivers of investments, including return, risk and costs. This potential combination is the lure of strategic beta and the reason for its soaring popularity, according to Victory Capital.
“Strategic beta provides a disciplined, active-like approach to indexing in a cost-effective manner, and it does a good job at balancing those three legs of the stool,” Mannik S. Dhillon, President of VictoryShares and Solutions with Victory Capital, said in the research paper. “It allows for transparent exposure to a portfolio of preferred factors and intuitive tilts. And as a strategic tool, I think it can enhance a passive allocation and counterbalance some of the inherent biases and other limitations of cap-weighted indexing, while striving to deliver alpha at lower costs than active strategies.”