Specifically, many are concerned about the indirect risks associated with top heavy, market cap-weighted index funds, especially in a prolonged bull market environment where the the largest component company stocks within these cap-weighted indices are also the priciest top performers.
Consequently, these rules-based, smart beta strategies are seen as a good alternative as they incorporate fundamental or alternative weighting methodologies to limit risks and potentially enhance returns, much like how active managers try to generate alpha.
“It’s active intuition with passive delivery,” Dhillon added.
Victory Capital also offers its own suite of smart beta ETFs that focus on volatility-based weighting methodology to potentially help investors generate improved risk-adjusted returns. For instance, the VictoryShares US 500 Enhanced Volatility Wtd ETF (CFO), VictoryShares US EQ Income Enhanced Volatility Wtd ETF (CDC) and VictoryShares US 500 Volatility Wtd ETF (CFA) start with the broad market and screens for companies with four quarters of positive earnings. Those stocks are then weighted based on their standard deviation over the past 180 trading days. Stocks with lower volatility are given higher weightings and stocks with greater volatility are given lower weightings. Ultimately, all securities that pass the earnings criteria are present, just at different weights.
For more on smart beta ETFs, visit our Smart Beta Channel.