Question

Give examples of smart beta ETFs or factor investment strategies. Why are these strategies popular?

Answer 1

A smart Beta ETF is a type of exchange-traded fund (ETF) that uses a framework based on rules to select investments to be included in the portfolio of funds. An exchange-traded fund or ETF is a kind of fund which tracks an index like the S&P 500. Smart beta ETFs draw on conventional ETFs and customize the portfolio components of the fund based on predetermined financial metrics.

Risk-weighted strategies include expected inventory volatility. Funds may restrict holdings to low-volatility stocks to minimize risk in the fund. Volatility is a function of how much the price of a commodity fluctuates, or in so much as it fluctuates in volume. Conversely, some investors embrace risk and may want to invest in a fund that focuses on companies with high potential for growth.

A fund is passive, since it tracks an index without a stock selection investment manager. As a result, passive funds tend to get lower fees. For instance, a fund might track all of the stocks in the S&P 500 to mimic or track every step exactly as the S&P Smart Beta is a combination of active and passive investments. This follows an algorithm that makes this passive, but it often takes into account alternative considerations when selecting stocks or assets from inside the algorithm. In other words, not every stock on the index will be selected by a smart beta fund which tracks the S&P 500 index. Instead, it may pick only those who demonstrate a particular behaviour, such as a certain percentage of sales growth.

Smart Beta approaches benefit from the use of similarly weighted indexation. This parameter excludes stock focus in the index with the largest market-cap weightings. When the largest stocks or portfolios are underperforming with market-cap weightings, they can have a substantial effect on index results compared to the smallest components of the index. Smart beta is not a passive technique like the conventional index funds weighted by market capitalisation. While many Smart Beta ETFs have higher ratios to cost than passive index items, they are less costly than other actively managed funds.