Strategic beta basics

Where does the “smart” in “Smart Beta” come from? And how does it fit in your portfolio?

Andrew Willis 22 March, 2019 | 2:00PM

Strategic or “smart” beta funds – particularly ETFs - are picking up in popularity worldwide. These products are touted as sophisticated and seemingly magical approaches to achieving alpha. These products are often managed around the idea of factors such as value, dividends, low-volatility, momentum and quality, and their historical association with higher returns.

A strategic beta product invests in the companies which provide exposure to the factors that are basis for the product’s investment approach. The product obtains the factor exposures by applying a set of mechanical rules so that human judgement is not involved once the rules are in place.

Strategic beta is the second dominant approach to active management, says Art Johnson, Founder and CIO at SmartBe Wealth. People are familiar with the first approach – involving humans – which involves a stock picking manager whose job is to beat the market for their customers using market timing and her or her own skills.

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Andrew Willis

Andrew Willis  Andrew Willis is a content editor for Morningstar.ca.

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