‘Smart Beta’: Bridging Active Vs. Passive and managing risk via volatility

Institutional investors have used alternative weighting and factor-driven strategies since the 1970s, though no one called them “smart beta” back then. Now that the term has become mainstream, nonmarket-cap-weighted ETFs have gained steam.

“Smart beta” approaches are currently the fastest-growing segment of the ETF marketplace, pulling in assets at twice the rate of the entire ETF market.

“The default setting for an ETF, a non-strategic beta ETF, is to be tied to an index whose components are weighted by market capitalization … A strategic (or “smart”) beta ETF, on the other hand, has its components weighted by some other criteria.”

Advantages & Disadvantages Of Smart Beta

To use smart beta effectively, you need to:

  1. Be able to identify which factor(s) can produce alpha
  2. Be able to identify when that factor will come in and/or out of favour via a market environment change

You may also need to overcome some disadvantages of smart beta; namely, the following:

  1. Ask yourself, does the expected alpha overcome higher expense ratios?
  2. More concentrated portfolios can increase return but they can also increase stock-specific risk.
  3. Wider spreads on trading these less liquid products require one to ask whether the expected alpha outweighs the risks.

Managing risk to the upside and downside via low-volatility and higher-volatility ETFs seems to be the most valid use of smart beta

http://europe.etf.com/blog/10378-smart-beta-bridging-active-vs-passive.html?showall=&fullart=1&start=2

Evolution of Indexing. Are you smarter about ‘smart beta’ ETFs?

maltaway_balattiboardmember_evolution_indexing

Smart beta ETFs. Alternatively-weighted ETFs. Indexing 2.0. Whatever you want to call this trend in exchange-traded funds, it’s attracting more investor dollars.

Overall, Morningstar slaps its “strategic beta” label on more than 340 ETFs that together have attracted more than $310 billion in assets. The entire U.S. ETF industry consists of about 1,600 products with $1.7 trillion in assets, so strategic beta has 18% of the asset pie.

If the SPY makes you feel like you’re getting a ride from a teen who’s had one too many energy drinks, then you might like SPLV. It aims to deliver a less choppy ride for risk-averse investors, as it tracks an index comprised of the 100 least-volatile S&P 500 stocks.

http://www.marketwatch.com/story/4-charts-to-make-you-smarter-about-smart-beta-etfs-2014-04-08