Credit: Shutterstock photoCinthia Murphy, Managing Editor, ETF.com
There’s still no bitcoin ETF on the market, but there’s plenty of debate among ETF investors over whether bitcoin and other cryptocurrencies belong in asset allocation.
This week, a research paper on the topic penned by Bitwise Asset Management’s Matt Hougan argued that cryptocurrencies actually improve a portfolio’s risk-adjusted returns over time, as well as diversification.
But ETF strategists are not so sure. Most are still reluctant to support the view that bitcoin and other digital assets belong in investment portfolios. Citing concerns over liquidity, price volatility and regulatory issues, by and large, they seem to agree that bitcoin in asset allocation falls in the “not yet” category.
Meanwhile, on the product side, the Winklevoss twins acquired a patent for cryptocurrency ETFs. It’s still unclear what this patent means to issuers looking for ways to bring to market bitcoin ETFs, but it adds another wrinkle to the ongoing conversation about bitcoin’s role in the world of investing.
Smart Beta vs Factor ETFs
To many, smart beta and factor ETFs are one and the same. But that’s an assumption that could actually be costing investors, say experts.
Put simply, smart beta and factors come from very different roots, and according to Research Affiliates’ Rob Arnott, “because factor investing begins by using a market-capitalization weight and then adds a factor tilt, it isn’t smart beta.”
Some say the term “smart beta” has gotten “stretched” beyond its original purpose; the same can be said about factor investing if you go back to the original Fama-French research.
For quick reference, check out ETF.com’s latest article on the topic, outlining these broad characteristics of each:
What Is Smart Beta?
- Smart beta ranks companies by their size rather than by their market capitalization
- When creating an index, the company’s size is used as an anchor to determine its weighting; that weighting is rebalanced if prices move extravagantly
- If a company’s price is soaring but the fundamentals of the company have changed, the index will trim the position; if the prices fall and the fundamentals haven’t changed, the index buys the stock.
- Takes into account alternative ways to measure worth, e.g., volume, liquidity, momentum
- Sometimes called equal weight, fundamental weight, alternative beta
- No single approach
- Usually long only
What Are Factors?
- An asset pricing model created by University of Chicago professors Eugene Fama and Kenneth French (now at Dartmouth)
- Fama and French found 5 main factors are associated with higher returns: value stocks, size momentum, low volatility and quality (also known as dividend payers); A 6th factor, yield, is sometimes included in the main factor definition count
- Different factors work during different times in the market cycle, but they can’t be timed
- Usually a long/short strategy
- Usually market-cap weighted, but can be used with fundamental weighting
- Nontraditional factors such as share buybacks, and environmental, social and governance tilts are becoming more popular as factor investing grows in use.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
