Smart beta exchange traded funds have attracted a growing following as the relatively new fund strategies combine tested actively managed investment styles with a cheap, index-based methodology.
On the upcoming webcast (available live and on demand for CE Credit), Strategic Beta’s Due Diligence Dilemma, Joe Staines, Research Analyst and Portfolio Manager of J.P. Morgan Asset Management, Jordan Stewart, Manager Research at J.P. Morgan Asset Management, Larry Whistler, President and Chief Investment Officer of Nottingham Advisors, will discuss connecting the divide between passive and active styles with a factor-based indexing methodology and review key considerations when incorporating a strategic beta fund strategy into a diversified portfolio.
The smart beta, enhanced, strategic beta, alternative or factor-based index ETFs all follow a similar theme where the underlying indices eschew conventional market capitalization-weighted methodologies for customized or rules-based allocations, tracking a range of strategies from equally weighting stocks to identifying momentum across different corners of the market, among many others. What ties the theme together is the ability to add exposure to specific factors found in traditionally active managed funds.
There are now hundreds of smart beta or factor-based strategies available, ranging from minor tweaks on existing broad-based indices to more customized options that capture returns from specific styles or asset categories. Consequently, potential smart beta ETF investors should clearly understand what their fund strategies do and how they achieve their target strategies.
For instance, something like the JPMorgan Diversified Return International Equity ETF (NYSEArca: JPIN) may be an attractive option to gain international equity market exposure. The underlying index diversifies risks that are less likely to be rewarded while overweighting areas that are more likely to produce positive results.
Related: Smart ETF Strategies for Building Stronger Portfolios
The underlying customized FTSE Russell index selects components based on a diversified set of factor characteristics, such as relative valuation, price momentum and quality. The enhanced indexing process would allow the ETF to exclude expensive, low quality companies with poor momentum, which could help the ETF diminish drawdowns without sacrificing too much from any potential upside of a market recovery.
Investors can take a look at the evolving ETF industry where factor-based investments could help better manage the risk premium. The strategic beta solutions could neutralize some risks, better diversify a portfolio and potentially generate improved risk-adjusted returns over the long haul.
Financial advisors who are interested in learning more about smart beta strategies can register for the Thursday, September 14 webcast here.