Factor Investing — August 1, 2016

What’s in a name? Part 1: In the case of smart beta, it’s hard to tell

Demand for passive investment strategies has exploded, and none has attracted more attention than smart beta. The attraction is plain to see. Passive investment via ETFs and other such products is easily accessible, has lower fees than traditional active management, and in the case of smart beta products, has the potential to outperform a cap-weighted passive index. So it is hardly surprising that these products are being aggressively marketed.

But do ETF buyers, especially those seeking smart beta strategies, really know what they are getting? The term “smart beta” has been applied to ETFs that attempt to capture well-known investment strategies—such as high dividend yield, value, and low volatility—with transparent, rules-based approaches that come with lower fees than traditional investments, better tradeability, and other attractive characteristics. In this paper, we focus on a few types of smart beta portfolios in order to highlight similarities and differences driven by methodology.

Part 2 of this series can be found here.


Sebastian Ceria

Chief Executive Officer

Melissa R. Brown, CFA

Managing Director of Applied Research