Smart beta investment portfolios are long-only rules-based investment strategies that aim to outperform a capitalization-weighted benchmark. A comprehensive analysis of smart beta strategies has found that smart beta strategies have underperformed by 1% on average since launch. The term smart beta was originally coined by Willis Towers Watson in 2006.

Demand for smart beta

Smart beta strategies have generated considerable interest from institutional investors in the wake of the

2008 financial crisis 8 (eight) is the natural number following 7 and preceding 9. In mathematics 8 is: * a composite number, its proper divisors being , , and . It is twice 4 or four times 2. * a power of two, being 2 (two cubed), and is the first number of t ...

. According to ETF.com, as of April 2019 there was approximately $880 billion invested in smart beta funds. The increase in demand has led to an increase in the number of products and there are more than 1000 smart beta ETFs on the market today. The demand/growth does not appear to be slowing down; in the 12-month period ending February 2019 77 new smart beta ETFs launched accounting for roughly 1/3 of all ETFs launched in the 12 month period. According to Morningstar, there were 632 strategic-beta exchange traded products at the end of June 2020 with $869.7 billion in assets.

Product landscape

Asset manager Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...

s including

BlackRock BlackRock, Inc. is an American multi-national investment company based in New York City. Founded in 1988, initially as a risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager, with tri ...

Legg Mason Legg Mason was an American investment management and asset management firm headquartered in Baltimore, founded in 1899 and acquired by Franklin Templeton Investments as of July 2020. As of December 31, 2019, the company had $730.8 billion in as ...

Henderson Rowe Henderson may refer to: People *Henderson (surname), description of the surname, and a list of people with the surname * Clan Henderson, a Scottish clan Places Argentina *Henderson, Buenos Aires Australia *Henderson, Western Australia Canada *H ...

Invesco Invesco Ltd. is an American independent investment management company that is headquartered in Atlanta, Georgia, with additional branch offices in 20 countries. Its common stock is a constituent of the S&P 500 and trades on the New York stock exc ...

and

WisdomTree WisdomTree Investments, Inc. is a New York-based exchange-traded fund (ETF) and exchange-traded product (ETP) sponsor and asset manager. WisdomTree launched its first ETFs in June 2006, and became one of the major ETF providers in the United St ...

all operate smart beta funds. To identify which type of smart beta provides the best fit, qualified institutional investors need to understand the expected return and risk for each of their active, passive, and smart beta allocations. Common factor based smart beta types revolve around six ideas for optimization (source: FTSE): * Liquidity: Amihud ratio – median ratio of absolute daily return to daily traded value over the previous year *

Momentum In Newtonian mechanics, momentum (more specifically linear momentum or translational momentum) is the product of the mass and velocity of an object. It is a vector quantity, possessing a magnitude and a direction. If is an object's mass ...

: residual

Sharpe ratio In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for it ...

* Quality: composite of profitability (return on assets), efficiency (change in asset turnover), earnings quality (accruals) & leverage * Size: full market capitalization * Value: composite of trailing cash-flow yield, earnings yield and country relative sales to price ratio * Volatility: standard deviation of 5 years of weekly (wed/wed) local total returns

External links

* MSCI Research Insigh
Foundations of Factor Investing

References

{{reflist Investment Portfolio theories