What are Smart Beta ETFs? Smart Beta ETFs are a trading tool that has the potential to transform the dominance of the ETF industry, which primarily consists of products based on market cap weighted indexes. Market cap weighted indexes have largely been the default strategy that represents the overall performance of the market. However, Smart Beta ETFs provide a new perspective, shifting away from the traditional market cap weighting system to offer investors a different approach to portfolio optimization.
1. Smart Beta ETFs are a novel trading tool with the potential to transform the predominantly market cap weighted index-based ETF industry.
2. Unlike traditional ETFs, Smart Beta ETFs shift away from the market cap weighting system and offer investors a different method for portfolio optimization.
3. Smart Beta ETFs not only rely on market cap weighted indexes but also utilize alternative index construction rules based on factors like volatility, momentum, quality, size, and value.
4. This shift in strategy provides a significant advantage as it allows investors to achieve potentially superior risk-adjusted returns.
5. Leveraging these alternative strategies, Smart Beta ETFs aim to outperform the market and deliver higher returns for investors.
As of 2020, there are over 1,400 Smart Beta ETFs globally with over $1 trillion in assets under management.
In traditional investing, ETFs or exchange-traded funds are designed to replicate the performance of a specific index, such as the S&P 500. However, smart beta ETFs introduce a new approach to this strategy. Unlike traditional ETFs, smart beta ETFs do not only rely on market cap weighted indexes. Instead, they utilize alternative index construction rules, based on factors like volatility, momentum, quality, size, and value. This provides an advantage, as it allows investors the potential to achieve superior risk-adjusted returns. By leveraging these alternative strategies, smart beta ETFs seek to outperform the market and deliver higher returns for investors.