Author: Nicholas Vardy
Back in 2012, smart beta investment products stood at the cutting edge of investment innovation.
Fast-forward five years and smart beta exchange-traded funds (ETFs) are among the most popular products in the investment world. Their growth has been impressive.
ETFdb.com tracks over 500 smart beta strategies in the United States alone and has found that more than one-third of pension funds are managing upward of $ 250 million invested in smart beta strategies. A full 97% of financial advisers plan to maintain or increase exposure to smart beta strategies in 2017.
The smart beta revolution has joined the mainstream.
What is Smart Beta Investing?
As popular as smart beta products are, you may find it hard to get your head around the meaning of “smart beta.”
So let’s start with something familiar: an index fund.
An index fund simply “buys the market” as defined by a mainstream index, such as the S&P 500.
The rationale for index funds is clear.
As Vanguard founder John Bogle has pointed out for decades, active money managers cannot outperform the stock market over the long term. Both high fees and lack of investment skill eat into any market-beating returns.
The verdict on active managers is clear.
In a recent study, S&P Dow Jones found that 99% of actively managed U.S. funds failed to beat the S&P 500 since 2006. A further 98% of global funds underperformed the S&P Global 1200 Index since 2006. And 97% of emerging markets funds underperformed their benchmark index over the past decade.
“Smart beta” strategies offer an ingenious solution to this conundrum.
To learn more about smart beta exchange-traded funds, please read the rest of the article here.