Smart Beta ETFs Don't Have to Be Complex to Do Their Job

The smart beta ETF segment is quickly expanding, with money managers rolling out increasingly sophisticated strategies that incorporate a number of investment styles.

However, investors should keep in mind that the best smart beta ETF investment is often the one that fits well with one’s own objectives.

“Smart beta doesn’t have to be complex. While some non-traditional index approaches rely on more involved quantitative modelling, some popular smart beta index construction approaches follow simple, intuitive methodologies,” according to a FTSE Russell note.

Passive investments now make up for $6 trillion of assets globally and 29% of assets under management, according to a 2017 Moody’s Investor Services report.

Smart beta is a subset of passive indices that depart from the standard market capitalization weighting methodology to achieve a particular objective, like generating excess returns, mitigating volatility or improving diversification. Nevertheless, smart beta, like traditional beta indexing, are constructed according to a consistent set of rules and are transparent.

Investors may notice a flurry of new smart beta index ETFs that incorporate multiple factors to generate improved risk-adjusted returns. However, some of the original smart beta indexing methodologies may still warrant some attention.