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What are smart beta ETFs How do they different from traditional index ETFs?
Smart Beta is a blend of active and passive investing, following an index but also considering alternative factors. Smart Beta ETFs rely less on market-cap weightings to avoid one stock overly influencing an ETF’s value. These funds have lower fees than actively-managed funds.
What is the difference between smart beta and factor investing?
There is a significant difference between smart beta and factor investing in portfolio construction. Smart beta ETFs have stock market correlations greater than 0.9. By contrast, a long–short multi-factor portfolio has zero correlation with beta.
What is a smart beta portfolio?
Smart beta investment portfolios are long-only rules-based investment strategies that aim to outperform a capitalization-weighted benchmark. A comprehensive analysis of smart beta strategies has found that smart beta strategies have underperformed by 1\% on average since launch.
Do smart beta funds represent passive or active investment strategies?
Their alternatively weighted construct, however, may provide for more frequent fund analysis and rebalancing than traditional index funds, giving them the potential to outperform a market index. Smart beta funds are often considered a hybrid of passive and actively managed strategies.
What are the risks of investing in smart beta funds?
Smart-beta strategies tend to exhibit increased exposure to small-cap stocks relative to capitalization-weighted indices. This can potentially increase the liquidity risk due to the need to regularly trade generally less liquid stocks.
What is meant by factor or smart beta investing and what is the rationale behind it?
Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization-based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way.