As a future financial planner and someone who just got a master’s degree in financial planning, I am a little different take on things. I believe that people can achieve the same results as many financial planners by using low-cost exchange-traded funds that follow an index of sorts, such as the S&P 500. But here is where things can get a little different, and the result is good news for you the investor. Exchange traded funds now use smart-beta indexes to purchase groups of equities and bonds. These funds use these smart-beta criteria to set up the criteria for the fund to follow. Meaning there is no management involved with the running of the fund thereby reducing the costs. This results in a much lower expense fee, on average these funds run about 0.6% compared to over 1.2% for funds managed by actual people.
The smart-beta funds follow a strict set of criteria that the programs do not allow for deviation as a fund run by a manager could possibly do. These funds look for advantages in certain equities, and then they try to take advantage of these irregularities. Say you want to have a fund that follows underpriced equities. The people who set up the exchange traded fund will write a set of parameters that it will follow and then search for the equity that falls into its criteria. Then no matter what happens to the managers of the fund the exchange traded fund will continue to follow its parameters that were set up initially. Removing the need to have an actual paid manager to run the fund, again reducing the overall costs of the fund.
These funds are set up with academic research as their basis depending on what the owners are using as a basis. As I touched on earlier the funds are meant to be passively managed and not actively managed by a person reducing the costs. Provided the parameters are correct when setting up the fund can operate for years without any human involvement what so ever. This is what allows the fund to keep its expense ratios so low. Once the parameters have been established in the smart-beta funds, they simply search for equities that fit their criteria and act on those parameters that were established.
Now there is a significant drawback to these funds that actively managed funds generally do not experience. In an actively managed fund the manager is held responsible for the fund’s performance and it the fund does not perform well they are relieved from their position. Also, managers retire which can have a dramatic effect on a fund with people leaving the fund to look elsewhere for similar results. With smart-beta funds, you can expect to outgain the market, but it could take years or decades for the results to be seen by the ones who purchased the fund. These in many instances are long-term investments and not fast turnaround investments.
With proper guidance and some research, I think anyone can invest with or without the assistance of a professional with the use of indexed and smart-beta exchange traded funds. Now there are thousands of these funds so it is difficult to pick the one that may or may not be right for you, but that is where a financial advisor can come in handy. If you use a fee-only advisor, they can assist you in developing a financial plan and assist in selecting the right mixture of exchange traded funds for your portfolio.
I really think that exchange traded funds are much better for someone’s portfolio than actively managed funds. Over the long haul, they should perform as well as the market in general. If you consider that the market on average returns about 8%, most of these funds will meet or possibly exceed that over a long period, meaning that they could be solid investments. After all, these funds are designed to find undervalued equities that will exceed the market over a long period. While no investment is guaranteed, these are at least a good alternative to an actively managed fund.
If you need more information or have any questions, please feel free to contact me or leave a message on the post.
FAQs
Smart Beta is a blend of active and passive investing. Smart Beta investing follows an index but also considers alternative factors in choosing the stocks from the index. Smart beta ETFs commonly include strategies that are equally weighted, fundamentally weighted, factor-based, or low volatility.
Are smart beta ETFs worth it? ›
The Benefits and Risks of Smart Beta ETFs
Smart beta ETFs offer several benefits to investors, including the potential for higher returns. However, there are also several risks associated with these funds, such as complexity and potential for tracking error, that investors should consider before buying shares.
Can an ETF have a beta? ›
Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is common.
What is the best beta ETF? ›
ETFs: ETF Database Realtime Ratings
| Symbol Symbol | ETF Name ETF Name | Beta Beta |
|---|
| SCHD | Schwab US Dividend Equity ETF | 0.88 |
| VYM | Vanguard High Dividend Yield Index ETF | 0.84 |
| RSP | Invesco S&P 500® Equal Weight ETF | 1.05 |
| IVW | iShares S&P 500 Growth ETF | 1.05 |
5 more rowsDisadvantages of a Smart Beta ETF
It results in low liquidity and does not allow the investors an easy exit of their positions. A smart beta ETF purchases the securities from an index that are to be included in the ETF. Hence, trading costs increase.
What is the largest smart beta ETF? ›
The largest Smart-Beta ETFs ETF is the Vanguard Growth ETF VUG with $132.47B in assets. In the last trailing year, the best-performing Smart-Beta ETFs ETF was FNGU at 131.41%. The most recent ETF launched in the Smart-Beta ETFs space was the Calamos Nasdaq-100 Structured Alt Protection ETF - June CPNJ on 06/03/24.
What are the benefits of smart beta? ›
Smart beta investing combines the benefits of passive investing and the advantages of active investing strategies. The goal of smart beta is to obtain alpha, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing.
Is smart beta the same as factor investing? ›
The Connection: Smart Beta as a Form of Factor Investing
For instance, a Smart Beta strategy that weights holdings based on low volatility is essentially a low volatility factor investing strategy. Similarly, a Smart Beta strategy that weights based on dividends could be seen as a high-dividend yield factor strategy.
Is smart beta active or passive? ›
Smart Beta is a hybrid investment approach that combines active and passive strategies. The goal is to offer individuals low-cost solutions that can beat a traditional market-cap-weighted stock index fund with lower volatility.
Does smart beta outperform? ›
Numerous studies have shown that smart-beta strategies have outperformed traditional index funds over the long term. For example, a study by Morningstar found that from 2003 to 2013, smart-beta funds outperformed traditional index funds by an average of 1.5% per year.
While beta looks at market return, alpha refers to returns in excess of (above or below) the market return. Smart beta strategies are systematic active investment strategies. By seeking to capture specific performance factors, they seek to capture alpha – delivering an excess return over an index.
Does the S&P 500 have a beta? ›
The beta of the S&P 500 is expressed as 1.0. The beta of an individual stock is based on how it performs in relation to the index's beta. A stock with a beta of 1.0 indicates that it moves in tandem with the S&P 500.
What is the number 1 ETF to buy? ›
Top U.S. market-cap index ETFs
| Fund (ticker) | YTD performance | 5-year performance |
|---|
| Vanguard S&P 500 ETF (VOO) | 11.1 percent | 15.5 percent |
| SPDR S&P 500 ETF Trust (SPY) | 11.0 percent | 15.4 percent |
| iShares Core S&P 500 ETF (IVV) | 10.3 percent | 15.3 percent |
| Invesco QQQ Trust (QQQ) | 11.6 percent | 21.8 percent |
Let's take the Nifty 200 Momentum 30's example. It's a smart-beta fund that looks at all the 200 companies in the Nifty 200 and then identifies 30 stocks with the strongest ' momentum '. Similarly, a Nifty 100 Low Volatility 30 fund finds the 30 least volatile stocks among the 100 companies in the Nifty 100.
Which ETF gives the highest return? ›
100 Highest 5 Year ETF Returns
| Symbol | Name | 5-Year Return |
|---|
| FNGO | MicroSectors FANG+ Index 2X Leveraged ETNs | 44.18% |
| TECL | Direxion Daily Technology Bull 3X Shares | 34.02% |
| SMH | VanEck Semiconductor ETF | 31.57% |
| ROM | ProShares Ultra Technology | 28.62% |
93 more rowsWhile the difference between rules-based smart beta and quantitative-driven active ETFs is relatively small, investors have been more attracted to the latter which is driving innovation in ETFs and the promise of outperformance.
What is the difference between beta and smart beta? ›
While beta looks at market return, alpha refers to returns in excess of (above or below) the market return. Smart beta strategies are systematic active investment strategies. By seeking to capture specific performance factors, they seek to capture alpha – delivering an excess return over an index.
