Content provided by Joe Smith, CFA, Senior Market Strategist
Smart beta ETFs are a popular topic in the ETF industry. This year’s Inside ETFs Conference, which drew almost 2,200 advisors and investment professionals, focused heavily on smart beta ETFs and what they mean for the industry. In breakout sessions and presentations, most of the conversation focused on the products and the advantages they can deliver over traditional market-cap-weighted indexes and active managers. But what most interests me is smart beta’s impact on the people who matter most – our clients. These innovative products have the potential for a meaningful impact on individual investors. Here’s how:
First, smart beta ETFs are built on the promise of consistency, not superior returns as many strategists or experts might say. A rules-based investment approach provides clients the security of knowing the investment process will not drift from its original mandate due to short-term behavioral biases.
Second, smart beta ETFs translate into more identifiable risk factors that are common across markets. These usually have embedded rules to target desirable risk factors or exclude undesirable risk factors. This means investors no longer have to be at the mercy of their traditional active stock pickers to decide when to rotate in and out of risky propositions.
At CLS, our X-Factor Investment Theme utilizes smart beta ETFs as additional tools for executing risk budgeting in all market conditions. In January, we relied heavily on minimum volatility and quality-oriented smart beta ETFs. As the chart illustrates below, each option delivered tangible benefits in differences of return outcomes for investors across all equity asset class segments, including the U.S.
So what’s the takeaway? Smart beta ETFs are here to stay and can provide great opportunities to help mitigate risk in heightened periods of uncertainty. We use smart beta because of its ability to seek greater consistency and improved outcomes within our risk budgeting approach. We believe these tools can empower investors by offering transparency, flexibility, and greater control – all at a lower cost. These tools will help investors meet their goals – and that’s what we’re here to do.