Is so-called smart beta investing a new and improved way to
invest or just another one of Wall Street's fancy sales
Smart beta strategies (formerly known as "fundamental
indexing") in the investment world generally fall into two camps:
1) Indexes that use a one-dimensional or simple formulas, like
equal weighting all the stocks within a benchmark like
the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) does.
Or, 2) Weighting stocks within a portfolio using a multiplicity of
complex factors like book value and cash flow, as does the
PowerShares FTSE RAFI US 1000 Portfolio (NYSEARCA:PRF).
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Although smart-beta pundits attempt to portray their strategies
as passive investing, the truth is the strategy resides somewhere
between active stock picking and traditional indexing with market
cap weighted benchmarks. Either way, smart beta's goal is to
outperform both strategies.
ETFs that weight companies by dividends like the
WisdomTree Total Dividend Fund (NYSEARCA:DTD) or by
earnings, like the WisdomTree India Earnings Fund (NYSEARCA:EPI)
are other offshoots of the smart beta movement, despite
their singular focus.
Over the past five years, PRF and RSP have handedly outperformed
the S&P 500 (NYSEARCA:VOO) and other cap weighted benchmarks
linked to large company stocks.
But even with impressive historical performance by
smart beta indexes comes a notable admission.
"Seen from another perspective, the
smart beta strategies inherently have value and small
size tilts relative to cap-weighted benchmarks," notes a 2011 paper
by Chow, Hsu, Kalesnik and Little.
That acknowledgement shows
that smart beta strategies are essentially an old
concept but in entirely new packaging. Can't investors
simply tilt their portfolios to overweight small cap
(NYSEARCA:IJR) and value stocks (
), rather than relying on a smart beta ETF to do it for
In my latest
, I talk with Herb Morgan at Efficient Market Advisors in San
Diego, CA about whether smart beta investing is good for
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