What are Smart Beta Funds?
Smart beta investing is an investment strategy that seeks to capture market returns while also outperforming traditional market capitalization-weighted index funds. It achieves this by using alternative weighting methods that differ from the traditional market capitalization weighting used in traditional index funds.
Smart beta funds typically weight their holdings based on factors such as fundamental measures (such as earnings or dividends), volatility, or some other metric. This can result in portfolios that are significantly different from traditional market capitalization-weighted indices, as well as portfolios that are more focused on certain sectors or factors.
Smart beta strategies aim to provide higher returns, lower risk, or some combination of the two, compared to traditional index funds. However, they can also be more complex and may come with higher fees than traditional index funds.
It’s important to note that smart beta strategies are not guaranteed to outperform traditional index funds and that past performance is not a guarantee of future results. As with any investment, investors should carefully consider their investment objectives, risk tolerance, and other factors before investing in a smart beta fund.
What’s the difference between Smart Beta and Index funds?
Index funds and smart beta funds are both types of passive investment strategies, but they have some key differences:
- Investment objective: Index funds aim to track the performance of a specific market index, such as the S&P 500, by holding all or a representative sample of the stocks in that index. Smart beta funds, on the other hand, aim to provide a better return than traditional index funds by weighting their holdings based on factors such as volatility, dividends, or earnings.
- Weighting methodology: Index funds typically weight their holdings based on market capitalization, meaning the largest stocks receive the largest weights. Smart beta funds, on the other hand, use alternative weighting methods, such as fundamental weighting or factor weighting, which can result in portfolios that are significantly different from traditional index funds.
- Risk and return: While index funds aim to provide a return that is similar to the market, smart beta funds aim to provide a better return than the market by using a different weighting methodology. However, smart beta funds can also be more risky than traditional index funds, as they may have a higher concentration in certain sectors or factors.
- Fees: Index funds typically have lower fees than smart beta funds, as they have a more straightforward investment strategy and lower management costs. Index management fees typically are between 0.05-0.2%pa. Smart beta funds, on the other hand, can have higher fees due to the more complex investment strategy and higher management costs. Smart Beta management fees typically range from 0.3-0.5%pa. Whereas active managed funds may have management fees ranging from 0.7-3.5%pa.
It’s important to note that both index funds and smart beta funds have their own advantages and disadvantages, and investors should carefully consider their investment objectives, risk tolerance, and other factors before choosing between the two.