Smart Beta strategies are growing in popularity as they offer another option in the passive and active investing debate. Smart Beta ETFs have grown in popularity with investors and financial advisors as they create opportunities for fee saving with sensible investing that is present in active management. Smart Beta strategies use historically tested rules to invest and get market (beta) exposure. Many Smart Beta strategies try to invest in value stocks as they are often considered better than expensive stocks, others focus also on small companies as they historically outperform large companies. Other Smart Beta triggers are low volatility, high dividend, trend, among other factors that are reflective of good companies.
The growth of Smart Beta ETFs and other Smart Beta products have grown tremendously as investors, advisors and institutions scour for returns to beat benchmarks. It is an easy choice to allocate to Smart Beta as it can solve the active and passive debate to lower costs. The only problem is that when portfolios are designed to chase performance instead of fundamental investing to achieve a specific purpose there is a risk of unexpected outcomes. Smart Beta when using indicators like momentum and buying a stock because it has gone up is very dangerous as it does not consider anything about the stock. Buying a stock just when it goes up is similar to investing in managed funds after they have shown superior results. Chasing performance more often than not leads to poor performance. Performance is created through analysis, design and an approach that is consistent.
We believe there are better designed portfolios then Smart Beta. Buying stocks because they go up is dangerous especially if you are in the top of a bubble. Many other indicators can lead to poor outcomes when used in bulk without proper analysis and research.
There is value to work with a portfolio manager that will protect you and your portfolio by understanding the flaws of Smart Beta and other factors. We would be happy to talk with you about your portfolio.