Commentary: Smart Beta vs. Alpha-Beta Combination

A recent article in CFA Institute suggests ways to combine alpha and beta factor strategies to create a “simple and clean equity portfolio” that offsets some of the “innate human weaknesses that sabotage our investment decisions.” According to the article, factor investing has generated positive excess returns—alpha—over time. Specifically, between 1926 and 2019, “a portfolio that combines small, cheap, and outperforming stocks” would have outpaced the broader market (data from Kenneth French) while one comprised… Read More

Cost of Smart Beta Leads to Distorted Investor Expectations

An article in CFA Institute reports that, although academic research has touted the benefits of “smart-beta,” investing, this research “largely ignores transaction costs that reduce returns significantly.” The article offers data reflecting the “flood” of academic papers on factor investing, “which provides the theoretical foundation of smart beta allocations,” but adds that creating factor portfolios in academia is “very different from building investable smart beta exchange-traded funds (ETFs).” This is due in large part to… Read More

Warnings About Smart Beta From Smart-Beta Index Provider

A white paper on smart-beta investing released this week by “veteran quant” Eric Shirbini of ERI Scientific Beta says that “second-order risks and exposures aren’t being sufficiently accounted for by investors or disclosed by providers.” This according to a recent article in Institutional Investor. “Just like monitoring the style drift of active managers,” writes Shirbini, “investors need to monitor the risk dynamics of factor strategies.” Specifically, Shirbini cites three categories of risk to be monitored:… Read More

Rob Arnott Steers Clear of FAANG Stocks

A recent Forbes article offers a recap of an interview with Research Affiliates’ founder and CEO Rob Arnott, including his insights regarding the market and “smart beta” investing. Here are some highlights: Research Affiliates’ index investing strategy weights companies by the size of their businesses rather than market capitalization (share price). Arnott argues, “Why would you want to have a bigger investment in a company just because it got more expensive? That makes no sense.”… Read More

Investing Insights Regarding Smart Beta Strategies

At this month’s 2017 Morningstar ETF Conference, Alex Bryan interviewed Chris Brightman, the chief investment officer of Research Affiliates, to discuss concerns regarding smart beta products. Here are some highlights: Bryan points out that while data provided by Research Affiliates shows strong back-tested performance for some smart-beta strategies, the “live” record of many of these products has been weak. Brightman clarified that his findings are not restricted to smart-beta strategies. “If we look across the… Read More

Smart Beta Investing May Not Be So Smart

A new study has raised questions as to whether smart beta mutual funds, which are on course to reach $1 trillion in assets by the end of 2017, are as “smart as they claim to be,” according to a recent article in the Financial Times. The article quotes University of Finland finance professor Antti Suhonen, who led the research, from his report (published in May): “Investing in smart beta does require good investor education, due… Read More

Indexing Beats Smart-Beta Track Record

Many smart-beta funds– which develop portfolios focusing on various factors such as low volatility, value, or momentum– have underperformed the market, especially after accounting for fees and expenses. This according to a recent MarketWatch article which concludes, “Tally another point in the pro-indexing column.” While the article points out that the rate of outperformance depends on the time frame analyzed, it says that “broadly, only 30% to 40% of smart beta exchange-traded funds beat their… Read More

Rob Arnott Questions Use of the Smart Beta Strategies He Pioneered

Rob Arnott, founder of Research Affiliates LLC, published a paper earlier this month in which he questions the use of some “smart beta” investment strategies he pioneered, according to a recent article in The Wall Street Journal. Arnott, known by many as the “godfather of smart beta,” says the popularity of some passive-investing strategies are making them expensive, and has “built tools that he says will help investors determine which strategies are overpriced.” In the… Read More

Simple is Smart in Smart-Beta Investing

Using a database of over 20 countries, a team of British academics tested the five most popular smart beta factors to see whether they would have proven successful over time. This according to a recent article in the Financial Times. The factors studied and respective finds are as follows: Low-risk: the highest returns “come from avoiding the riskiest stocks, rather than seeking out the least risky.” When divided into quintiles going back to 1963, the… Read More

Rob Arnott Says Clock is Ticking on Smart Beta ETFs

A smart-beta pioneer, Rob Arnott of Research Affiliates warns that these investment vehicles are in a bubble, says an article in last week’s Bloomberg. Smart-beta ETFs organize securities based on quantitative factors like volatility or “cheapness”, and the article explains that Arnott’s position is nothing new (he publicly battled with Cliff Asness on the topic a year ago). In fact, his firm’s website (Research Affiliates specializes in “cheap-stock” ETFs) offers investors a tool to gauge… Read More