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Smart Beta – A Quick Overview

Oct. 21, 2015

Oct. 21, 2015

Smart beta is the name given to benchmarks whose membership is constructed on criteria other than market capitalization.

They were born out of the idea that allocating the biggest weight to the largest companies is intrinsically a flawed strategy, as it pushes resources into stocks whose price has usually already outpaced the market. By using criteria and alternative weighting schemes such as return on equity or sales growth, smart beta aims to more efficiently capture returns – and, in many cases, to bring about those gains with lower volatility too.

Academic literature has provided evidence that quality factors have delivered positive excess returns in the long run, with defensive characteristics and lower risk across historical business cycles.

In adopting these indices, money managers take a passive approach where stock-picking is based on strict index methodology. Yet they keep the active view on drivers of returns. Because products tied to smart beta indices don’t employ an active manager, fees are significantly reduced.

According to Blackrock Inc., there was $255 billion invested in smart beta exchange traded funds through July 2015, up from $111 billion in 2012.

STOXX has an extended range of smart beta-indexing products, covering a large set of strategies and spanning most regions.

 

 

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