Smart Beta is all the rage in the fund management world these days. Smart Beta is another way of saying "factor" investing. Define a factor you like, rank stocks by that factor and use it to create an index. Then form an ETF to sell the strategy. Interesting in concept but it is important to remember that Smart Beta is borrowing concepts from active management. Active managers may buy and weight stocks in their portfolio by PE, Enterprise Value/EBIT ratios or Price/Sales ratio or a hose of other metrics. In the final analysis, Smart Beta is a way of turning active management into passive management. Since passive management (i.e. Indexation) is where the growth in assets are in fund management world, asset managers are looking for an edge that will get the individual and institutional investor to select one of their funds instead of competitors.
We have not been big believers in Smart Beta as we have not seen statistical evidence that it is any better than buying an index fund. Many of our readers buy & hold mutual funds or ETFs for the long run. If we see a good article that addresses some of their issues, we want to share it with them. We just ran across such an excellent article about Smart Beta, written by Richard Wiggins and publish by Institutional Investor. Click here to see the original article. For convenience, the article is reprinted below. The author makes a great point, once you incorporate more than one Smart Beta fund in a portfolio, any potential benefit tends to get diversified away, leaving you with no benefit at all.
