Investing Insights Regarding Smart Beta Strategies

At this month’s 2017 Morningstar ETF Conference, Alex Bryan interviewed Chris Brightman, the chief investment officer of Research Affiliates, to discuss concerns regarding smart beta products. Here are some highlights: Bryan points out that while data provided by Research Affiliates shows strong back-tested performance for some smart-beta strategies, the “live” record of many of these products has been weak. Brightman clarified that his findings are not restricted to smart-beta strategies. “If we look across the full range of ETF strategies that come to market, active and passive, what we find is that the performance leading up to the launch of […]

Smart Beta Investing May Not Be So Smart

A new study has raised questions as to whether smart beta mutual funds, which are on course to reach $1 trillion in assets by the end of 2017, are as “smart as they claim to be,” according to a recent article in the Financial Times. The article quotes University of Finland finance professor Antti Suhonen, who led the research, from his report (published in May): “Investing in smart beta does require good investor education, due diligence, monitoring of the investment and, most importantly, a strategic and realistic setting of investment objectives for the strategies.” Suhonen’s study examined 215 strategies developed […]

Indexing Beats Smart-Beta Track Record

Many smart-beta funds– which develop portfolios focusing on various factors such as low volatility, value, or momentum– have underperformed the market, especially after accounting for fees and expenses. This according to a recent MarketWatch article which concludes, “Tally another point in the pro-indexing column.” While the article points out that the rate of outperformance depends on the time frame analyzed, it says that “broadly, only 30% to 40% of smart beta exchange-traded funds beat their benchmark on an absolute basis, while only 25% to 32% do on a risk-adjusted basis” (data provided by UBS). According to the article, the absence […]

Rob Arnott Questions Use of the Smart Beta Strategies He Pioneered

Rob Arnott, founder of Research Affiliates LLC, published a paper earlier this month in which he questions the use of some “smart beta” investment strategies he pioneered, according to a recent article in The Wall Street Journal. Arnott, known by many as the “godfather of smart beta,” says the popularity of some passive-investing strategies are making them expensive, and has “built tools that he says will help investors determine which strategies are overpriced.” In the paper, titled “How Can ‘Smart Bet’ Go Horribly Wrong?” Arnott singles out low-volatility funds, saying that inflows have driven up valuations which, in turn, are […]

Simple is Smart in Smart-Beta Investing

Using a database of over 20 countries, a team of British academics tested the five most popular smart beta factors to see whether they would have proven successful over time. This according to a recent article in the Financial Times. The factors studied and respective finds are as follows: Low-risk: the highest returns “come from avoiding the riskiest stocks, rather than seeking out the least risky.” When divided into quintiles going back to 1963, the article explains, the highest-risk portion returned only 4.1 percent while the other four returned at least 10.9 percent. Momentum: Returns were volatile but, over time, […]