Smart beta investment portfolios are long-only rules-based investment strategies that aim to outperform a capitalization-weighted benchmark.[1] A comprehensive analysis of smart beta strategies has found that smart beta strategies have underperformed by 1% on average since launch.[2]
The term smart beta was originally coined by Willis Towers Watson in 2006 referring to the fundamental index.[3]
Approach
editCommon factor based smart beta types revolve around the following ideas for optimization: [4][citation needed]
- 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 enterprise value, book value, revenue, cashflow and dividends.
Product landscape
editAsset managers including BlackRock, Legg Mason, 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.[vague]
Demand for smart beta
editThis section needs to be updated. (October 2025) |
Smart beta strategies have generated considerable interest from institutional investors during the 2008 financial crisis. According to ETF.com,[5][6] as of April 2019[update] 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 As of February 2019[update] 77 new smart beta ETFs launched accounting for roughly 1/3 of all ETFs launched in the 12 month period. According to Morningstar, as of June 2020[update] there were 632 strategic-beta exchange traded products with $869.7 billion in assets.[7]
See also
editReferences
edit- ↑ "What Is Smart Beta?".
- ↑ Huang, Shiyang; Song, Yang; Xiang, Hong (2020). "The Smart Beta Mirage". doi:10.2139/ssrn.3622753. S2CID 225758335. SSRN 3622753.
- ↑ Arnott, Rob (November 2021). "Smart beta: sometimes smart, sometimes not". Financial Times.
- ↑ source: FTSE
- ↑ "What's Working In Smart Beta ETFs | ETF.com". www.etf.com. Retrieved 2019-06-27.
- ↑ "1039 Smart-Beta ETF Reports: Ratings, Holdings, Analysis | ETF.com". www.etf.com. Retrieved 2019-06-27.
- ↑ Johnson, Ben (July 17, 2020). "Did Strategic-Beta Products Pass the Test?". Morningstar.com. Retrieved August 18, 2020.
External links
edit- MSCI Research Insight Foundations of Factor Investing