1. beta is a measure of a security's or portfolio's volatility in comparison to the stock market as a whole.
2. "beta" is also used as shorthand to describe getting broad stock-market exposure, typically through investments that often track the S&P 500 and other major indexes.
3. Smart beta strategies occupy a middle ground between passive and active investment approaches. Smart beta funds are similar to passive index funds in their use of a systematic, rules-based framework to create portfolios. Smart beta strategies deviate from traditional index funds by emphasizing factors that may enhance returns relative to capitalization-weighted indexes.
ADVANTAGES OF SMART BETA
1.An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.
2. Exchange Traded Funds (ETFs) are typically market-capitalization weighted. Big companies automatically represent a bigger part of the portfolio. Strategic beta helps to get a broad exposure to the market in a systematic fashion.
3. A strategic beta ETF starts building its portfolio with the same stocks that are included in a capitalization-weighted index, but applying a quality factor would mean that the ETF would invest only in the index constituents that appear to have healthy profits and strong balance sheets.
4. It can also overweight high-quality stocks relative to a traditional capitalization-weighted ETF with other factors such as value, momentum and low volatility.
5. Some Smart Beta portfolios have filters to screen out undesirable stocks and a repeatable rules-based framework to determine position allocations.
6. Some portfolios are rebalanced quarterly, and stocks sold are replaced by new ones with more attractive characteristics.
STRATEGIC BETA RISKS
1. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF's net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged.
2. Shares of ETFs they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
3. Performance of ETFs may vary significantly from the performance from the performance of an index, as a result of transaction costs, expenses and other factors
CONSIDERATIONS
1. Be realistic about return expectations. Past performance is no guarantee of future performance, particularly when prior results are from simulations using historical data. Given the increasingly popularity of smart beta products, it's likely that future return premiums will be lower than historical return premiums.
2. Determine the portfolio role for smart beta, and select the investment that is the best "fit" for the role. Single factor, standalone smart beta strategies may be appropriate for portfolios using smart beta as a supplement to traditional market-capitalization-weighted index funds or diversified portfolios of active funds. Conversely, some investors may prefer a multi-factor approach to reduce single factor volatility if smart beta is used in place of traditional index funds.
3. Understand the "natural habitat" and implementation approach of smart beta strategies. Some smart beta strategies may concentrate in a limited number of sectors. For example, in recent years, dividend and low volatility strategies have had significant holdings in utilities and consumer staples stocks. Some smart beta products will limit sector concentration, while others have less restrictive approaches. Understanding the details behind investment selection and implementation will help investors avoid unintended portfolio concentration.
4. Be patient. Smart beta strategies can be highly cyclical, and can remain out of favor for extended periods of time. It is important to develop expectations about how the smart beta strategy will perform when the strategy is out of favor. Establishing realistic expectations increases the likelihood of sticking with smart beta during periods in which the strategy is out of favor.
5. Concentration Risks. If one strategy appears to have found the magic solution of reducing risk and boosting returns significantly, then you can expect money to flow into the strategy and competitor funds to appear. This flow of money can skew future performance and change the behaviour and risk volatility characteristics of the funds
THOUGHTS
1. Investing in a capitalization-weighted ETF will give you broad exposure to the stock market, including inadvertent exposure to many stocks that may not be considered high quality. By contrast, a strategic beta ETF takes what we consider a smarter approach, shifting the parameters to invest in stocks from the broader index to reflect the desired factors.
(Source: Seekingalpha,MoneyMarketing)
