A Beginners Guide to Smart Beta Investing

Strategic-beta, commonly known as “smart beta” funds aim to either improve the return profile, or minimise risk, relative to more traditional index tracking funds and ETFs

Monika Dutt 6 June, 2017 | 3:15PM
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Strategic-beta, also known as “smart beta” funds take active bets that result in portfolios that deviate from the purely market-cap-based construction of common indices, strategic-beta funds are index-linked. In that sense, they remain strictly passive.

For equities, where the bulk of the assets sit, this is how it works in practice: stocks are selected from a market cap benchmark such as the FTSE 100 or the S&P 500 when they meet certain factor-based criteria. The resulting portfolio will be tilted toward one or more factors, including value, volatility or momentum, relative to the parent index. Academic evidence suggests that certain factors outperform the broad market over the long haul.

Generally speaking, strategic beta funds fall into two main camps: return seeking and risk oriented. While return-seeking funds aim to enhance returns compared to market-cap weighted benchmarks, their risk-oriented cousins provide a smoother ride through market cycles.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
iShares Edge MSCI USA Val Fac ETF $ Acc8.82 USD0.14Rating
iShares Edge S&P 500 Min Vol ETF USD Acc78.14 USD0.37Rating
SPDR® S&P 500 Low Volatility ETF66.55 USD0.10Rating

About Author

Monika Dutt  is a Passive Strategies Research Analyst for Morningstar Europe

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