Smart Beta ETFs to Diversify Portfolio Risks

Investors enhance returns by accessing time-tested, actively managed investment styles in a cheap exchange traded fund investment vehicle through the new breed of smart beta strategies that follow rules-based indexing methodologies.

“The return premiums expected from smart beta are grounded in investor biases which are systematic in nature, as opposed to unsystematic misjudgments of a stock’s fair value,” Mike LaBella, Portfolio Manager at Legg Mason investment affiliate QS Investors, said in a note.

For example, LaBella pointed out that value stocks have outperformed growth stocks over the long-term, with some attributing this as the result of overly confident investors being too optimistic about companies’ growth prospects. Meanwhile, defensive stocks have historically outperformed the market on a risk-adjusted basis, which may attributed to investors being drawn to betting on big payoffs, causing growth and risky stocks to be overvalued in capitalization-weighted indices.

As a way to provide a better play on value or improve risk-adjusted returns, investors may consider smart beta plays like the Legg Mason Low-Volatility High-Dividend ETF (NASDAQ: LVHD). The low volatility high dividend ETF should help investors who are seeking new sources of yield in a changing market environment. The funds focus on companies with relatively high yield and low price and earnings volatility, and the funds also target profitable companies.

Additionally, through a partnership with QS Investors, the Legg Mason US Diversified Core ETF (NasdaqGM: UDBI) takes a macro, top-down approach that helps balance risk to deliver broad market exposure through QS Investors’ proprietary Diversification Based Investing (DBI) rules-based methodology. Through the DBI approach, the group of global stock ETFs should exhibit low correlation of excess return to active stock managers and traditional market cap-weighted indices. The DBI methodology also helps diminish concentration risk within country and sector exposures.