Smart Beta
Candlefocus EditorSmart Beta invests in a broad, diversified portfolio of stocks, similar to index funds. The main difference is the weighting scheme used to allocate the capital. This weighting scheme is based on factors such as volatility, liquidity, quality, value, size and momentum, rather than simply the market capitalization of the stock. This can lead to an increased return on investment over time, as the investor is aiming to capitalise on specific areas of inefficiency in the market.
Smart Beta funds are also generally cheaper than actively managed funds, as they don’t require the cost of a professional fund manager to trade it. This can also make them more tax efficient, since they don’t incur the large trading costs that active funds can.
The main benefits of Smart Beta investing include the ability to capture market inefficiencies in a rules-based and transparent way, that normally only experienced fund managers would be able to achieve. Additionally, they can offer a divergence of broad market returns, as they are tracking different factors than the index funds and ETFs. Furthermore, as Smart Beta funds diversify across multiple stocks and factors, they can offer greater downside protection if compared to an individual stock investment, as well as greater liquidity.
Overall, Smart Beta funds offer a more targeted approach for investors who want to take advantage of certain factors in the market, such as value or volatility. They also have the potential to increase returns over time, and can be cheaper than investing in an actively managed fund. For these reasons, Smart Beta has become increasingly popular in recent years, and is likely to continue to gain traction in the future.