What is Smart Beta and How Does it Protect Investors?

With U.S.-China trade deal negotiations in limbo, investors are seeing volatility return to the markets. The latest market movements emphasize the need for smart beta strategies–an extension of the overarching theme for investors to get strategic in 2019.

But what exactly is smart beta?

“Smart beta, also called factor investing, is rooted in academic research from Eugene Fama, a professor at the University of Chicago’s Booth School of Business, and Ken French, a finance professor at the Tuck School of Business at Dartmouth College,” wrote Debbie Carlson in U.S. News. “They found certain investment factors such as a company’s size, a firm’s price-to-book ratio and market risk would over time outperform the broader S&P 500 index.”

With the gist of smart beta in mind, investors must now understand exactly how they help during times of market volatility. This is essential given that investors nowadays prefer to have this downside protection built in to ETF products.

“It’s like a hedge strategy,” said Kip Meadows, founder and CEO of Nottingham, a fund administration firm and white-label ETF issuer in Rocky Mount, North Carolina. “If you have a downturn, the theory is the company that has the better fundamentals, like a higher dividend, it should outperform and provide investors protection.”

However, investors don’t have to assume more risk in order to ferret out the most profitable opportunities. Smart beta strategies can help limit the downside in market drawdowns and capture gains when markets are in an upswing.

Given the latest volatility due to a breakdown in the U.S.-China trade deal, what exchange-traded products (ETPs) are there available in the marketplace that can address this concern for volatility risk while at the same time, realize any upward gains realized when markets rise? At the same time, what product can provide investors with the international exposure necessary for diversification?

One such product is the Natixis Seeyond International Minimum Volatility ETF (MVIN). MVIN focuses on developed markets and seeks to generate long-term capital appreciation with less volatility than typically experienced by international equity markets–the minimum volatility approach helps diminish portfolio risk.

MVIN gives investors:

  • Less volatile approach to diversify internationally
  • Long-term capital appreciation seeking less volatile international stocks
  • Actively managed ETF with the ability to adapt over time

Even with U.S. equities rebounding from last year’s fourth-quarter tumult, it still makes sense to buy into a product like MVIN, which can provide investors with the duality of realizing gains during a market upswing and protect investors in a downturn.

“For investing purposes, we make the assumption that the more risk we take, the more return we receive is true across everything that we do in investing,” said Alex Piré, Head of Client Portfolio Management, Natixis Seeyond. “Our studies and academic research have shown that’s not the case. If you’re allocating across risky assets, it’s not the same thing as if you’re allocating across stocks that potentially have very high correlations to each other.”

For more relative market trends, visit ETFtrends.com.