We take a look at smart beta, and what it could bring to your portfolio.
An introduction to smart beta ETFs
Smart beta is one of the fastest-growing investment categories today, gaining increased awareness among investors, fund managers and the press – and the easiest way to access its benefits is through a smart beta ETF. Here’s an introduction to how these ETFs work, and why you might want to consider investing in them.
What is a smart beta ETF?
A smart beta ETF is a form of investment that follows the performance of existing indices, just like traditional ETFs; but they also take other factors into account in an attempt to generate a higher return that the index they are tracking.
In that respect, they combine both active and passive investing:
- Active because their goal is to outperform their base index (after taking risk, return and cost into account)
- Passive because they have a transparent structure, and operate via a strict set of rules
By combining both active and passive strategies, smart beta ETFs aim to offer enhanced returns, improved diversification, and lower risk than other forms of investment.
What factors might smart beta ETFs take into account?
Smart beta managers will typically focus on the same market factors that traditional asset managers have used to return profits – but will usually do so at a fraction of the cost.
They may, for instance, focus on finding value in the market. Investors are used to the idea of buying low and selling high – smart beta ETFs will look under-priced assets that look set to rise in price.
Or they may look for quality, focussing on established companies with stable earnings and low levels of debt. In challenging markets, these stocks might perform more effectively.
Alternatively, they could look for momentum as an investment theme, and choose to look at low cap stocks. Or they might go look for assets that offer less price volatility than the market as a whole.
Popular smart beta ETFs
There’s a wide range of different smart beta ETFs available on the market. Here is a few popular funds among IG traders:
- WisdomTree Europe Equity UCITS ETF, provided by WisdomTree
- iShares Edge MSCI World Minimum Volatility UCITS ETF, iShares by BlackRock
- iShares Edge MSCI World Value Factor UCITS ETF, iShares by BlackRock
- Lyxor UCITS ETF Russell 1000 Growth, Lyxor
Data from IG, March 2017
Or if you’d like to see our full range of funds, take a look at what’s available on our ETF screener.