Smart Beta ETFs - A marketing gimmick?

Abraham Fu By Abraham Fu, 21st Feb 2015 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Money>Investing

Insight into what Smart Beta ETFs are and if they are worth investing in.


This is just a fancy word that means market risk. In other words, how much systematic risk (risk you cannot diversify away) are you taking on. A beta of would be the same as if you had invested in the entire market.

What's special about Smart Beta?

Let's take the S&P index (SPY) for example, it follows the hold the stocks in the same manner as the actual S&P 500 - each stock has a proportional weight based on it's market cap (or how much the company is worth overall). Smart Beta ETFs on the other hand, weight the stocks differently. Some smart beta funds weight all stocks equally and other could weight it based on how volatile a stock is.

No matter how it's weighted, smart beta ETFs imply that it can outperform its respective index fund.

Does it beat its respective index fund?

This is a bit of a loaded question: by changing the weighing you are effectively buying a slightly different risk profile and it’s not quite an apples to apples comparison. Having said that, I'll compare a couple of Smart Beta examples (SPLV) and (RSP) versus SPY (the index fund)

Do Smart Beta ETFs always outperform?

While past performance is not indicative of future performance, we can see that in the short run the low volatility ETF beat the other two, while in the long run, it seems that RSP (equal weighted) has beat market cap weighted. However, it is not that simple -- I've elaborated in this article on just how the smart beta ETF RSP outperforms.

So should I invest in Smart Beta ETFs?

Not all Smart Beta ETFs are created equal. You may be able to find some that are better suited for you compared to the market cap weighted funds depending on your time horizon and risk profile. If you do chose Smart Beta ETFs, be sure that the fund plays nicely with the other funds in your portfolio so that you have the asset allocation you want.


Etfs, Investment, Smart Beta, Smart Beta Etfs

Meet the author

author avatar Abraham Fu
I’m a Duke grad and a CFA charterholder (Chartered Financial Analyst). When I’m not working I like to poke around and see how I can keep more of my money, grow it faster and reduce the

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author avatar Sivaramakrishnan A
22nd Feb 2015 (#)

If one is investing good amount we can tailor make the stocks we want to bet on and the risk we take. Thanks for this useful info, Abraham - siva

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