An introduction to smart beta ETFs

We take a look at smart beta, and what it could bring to your portfolio.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

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:

  1. WisdomTree Europe Equity UCITS ETF, provided  by WisdomTree
  2. iShares Edge MSCI World Minimum Volatility UCITS ETF, iShares by BlackRock
  3. iShares Edge MSCI World Value Factor UCITS ETF, iShares by BlackRock
  4. 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.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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