Smart beta ETFs are beginning to draw a lot attention from investors and traditional fund providers alike, but the smart beta concept is nothing new.
“We have over a hundred products in the smart beta space, and of those products, there’s sixty percent of them have actually a five-year track record,” Eric Pollackov, Global Head of ETF Capital Markets for Invesco PowerShares, said at the Charles Schwab Impact Conference. “So we’re not showing you back tested data. We’re showing you real live data.”
For example, the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) is one of the most popular smart beta ETF products out there, accumulating $7.5 billion in assets under management since it began trading back in May 2011.
The PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF), which has been around since December 19, 2005, ranks among the longest running smart-beta ETFs in the U.S. markets. PRF tracks 1,000 U.S. stocks that show the highest fundamental strength based on the RAFI fundamental indexing methodology, which screens for sales, book value, cash flow and dividends.
Furthermore, Pollackov pointed out that these smart beta indexing methodologies are much more dynamic or more free to adapt to changing market conditions. During the financial crisis when financials were taking a beating, some smart beta or fundamental index-based ETFs were able to rebalance and reconstitute holdings to diminish exposure to some of the less attractive areas of the market to reduce downside risk.
Through instances like the financial crisis and other changing market environments, investors may find that smart beta indexing methodologies more closely mirror actively managed investment styles that are able to more freely adapt to changing conditions. However, smart beta ETFs are still passive in nature but their indexing methodology follows a strict rules-based strategy to minimize potential losses and still capture any upside potential.
“You saw exactly what happened in our U.S. fundamental products is where we actually started to scoop up by rule – not by active management but by rule – we started to take on a lot of those financials and it outperformed the index quite well,” Pollackov said, explaining how fundamental indexing picked up some of the most oversold areas as a way to play on cheap valuations following the financial crisis.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.