Smart beta
{{short description|Investment strategy that adds active features to passive strategies.}}
Smart beta investment portfolios are long-only rules-based investment strategies that aim to outperform a capitalization-weighted benchmark.{{Cite web|url=https://www.thebalance.com/what-is-smart-beta-5206921|title=What Is Smart Beta?}} A comprehensive analysis of smart beta strategies has found that smart beta strategies have underperformed by 1% on average since launch.{{Cite web|url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3622753|title=The Smart Beta Mirage|date=2020 |doi=10.2139/ssrn.3622753 |ssrn=3622753 |last1=Huang |first1=Shiyang |last2=Song |first2=Yang |last3=Xiang |first3=Hong |s2cid=225758335 }}
The term smart beta was originally coined by Willis Towers Watson in 2006 referring to the fundamental index.{{Cite news|url=https://www.ft.com/content/7dc7a578-346a-47dc-84b3-27dfa827d0d0|title=Smart beta: sometimes smart, sometimes not|newspaper=Financial Times |date=November 2021 |last1=Arnott |first1=Rob }}
Demand for smart beta
Smart beta strategies have generated considerable interest from institutional investors during the 2008 financial crisis. According to ETF.com,{{Cite web|url=https://www.etf.com/sections/features-and-news/whats-working-smart-beta-etfs?nopaging=1|title=What's Working In Smart Beta ETFs {{!}} ETF.com|website=www.etf.com|access-date=2019-06-27}}{{Cite web|url=https://www.etf.com/channels/smart-beta-ETFs|title=1039 Smart-Beta ETF Reports: Ratings, Holdings, Analysis {{!}} ETF.com|website=www.etf.com|access-date=2019-06-27}} as of April 2019 there was approximately $880 billion invested in smart beta funds. The increase in demand has led to an increase in the number of products and there are more than 1000 smart beta ETFs on the market today. The demand/growth does not appear to be slowing down; in the 12-month period ending February 2019 77 new smart beta ETFs launched accounting for roughly 1/3 of all ETFs launched in the 12 month period. According to Morningstar, there were 632 strategic-beta exchange traded products at the end of June 2020 with $869.7 billion in assets.{{Cite web|last=Johnson|first=Ben|date=July 17, 2020|title=Did Strategic-Beta Products Pass the Test?|url=https://www.morningstar.com/articles/992082/did-strategic-beta-products-pass-the-test|archive-url=|archive-date=|access-date=August 18, 2020|website=Morningstar.com}}
Product landscape
Asset managers including BlackRock, Legg Mason, Henderson Rowe, Invesco and WisdomTree all operate smart beta funds. To identify which type of smart beta provides the best fit, qualified institutional investors need to understand the expected return and risk for each of their active, passive, and smart beta allocations.
Common factor based smart beta types revolve around the following ideas for optimization (source: FTSE):{{cn|date=March 2020}}
- Liquidity: Amihud ratio – median ratio of absolute daily return to daily traded value over the previous year
- Momentum: residual Sharpe ratio
- Quality: composite of profitability (return on assets), efficiency (change in asset turnover), earnings quality (accruals) & leverage
- Size: full market capitalization
- Value: composite of trailing cash-flow yield, earnings yield and country relative sales to price ratio
- Volatility: standard deviation of five years of weekly (wed/wed) local total returns
- Fundamental Index (RAFI): index based on the fundamentals of enterprises, book value, revenue, cashflow and dividends.
See also
References
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External links
- MSCI Research Insight [https://www.msci.com/resources/pdfs/Foundations_of_Factor_Investing.pdf Foundations of Factor Investing]