An Introduction to Smart Beta and Relative Strength

This series is republished with permission from Market Realist. Editor Peter Barnes of Market Realist interviews two Nasdaq Global Information Services leaders: Dave Gedeon, Head of Research and Product Development, Nasdaq Global Information Services and Tom Dorsey, Founder of Dorsey, Wright & Associates, a Nasdaq Company.

PART 13 OF 18

In this section of the interview, Market Realist interviews Tom Dorsey, the founder of Dorsey, Wright & Associates. Dorsey Wright, which was acquired by Nasdaq Global Indexes in early 2015, specializes in technical analysis strategies and has developed a suite of indexes, which are utilized by PowerShares and First Trust as a basis for a suite of distinct ETF products.

Market Realist: How do you define smart beta?

Tom: To me, smart beta is a rules-based process that can be clearly defined, that the buyer of the product can understand completely, and helps to manage money in a logical and organized way.

Sixteen years ago, Dorsey, Wright & Associates found that the best approach for us was to computerize a previously labor-intensive process. Our approach today, which is relative strength, is no different from what we did 28 years ago by hand. Now that computers can do it a lot faster for us, we can evaluate a larger number of opportunities. So again, smart beta to me is a rules-based methodology to managing money.

Market Realist’s View: An introduction to smart beta and relative strength

Smart beta investing tries to rewrite investment rules in order to improve investment outcomes by targeting exposures to well-understood investment ideas. Smart beta captures investment factors through a rules-based approach. The factors include momentum, quality, value, and size along with minimum volatility. Smart beta indices generally invest in stocks with certain themes, such as stocks characterized by high-quality fundamental attributes, the valuation and size of the company, and so on.

As the graph above1 shows, smart beta strategies have outperformed the S&P 500 (IVV) historically. The factors tracking momentum stocks (PDP) have done particularly well, followed by quality (QUAL) and size (SIZE). In the long term, smart beta strategies tend to outperform markets.

On the other hand, relative strength is a momentum investing technique that compares the performance of a particular security to that of other securities or broader markets. It calculates which securities are the stronger performers and recommends investing in them. It assumes a security whose price has been rising will continue in that direction.

For more information about Nasdaq’s Smart Beta offering, please visit our website or contact us here.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm.Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives. Advice from a financial professional is strongly advised.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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