Industry Updates

An independent voice on smart beta

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Smart beta and factor investing has been a huge growth area in recent years. There is now more than $1 trillion invested in all the available smart beta funds worldwide.

But there has been remarkably little independent commentary on this fast-growing sector, and that's why ETFstream has decided to launch a new quarterly magazine called 'Beyond Beta.' It's going to be a subscription publication but the first edition will be published for free on the ETFstream site this week.

If you don't know what smart beta is, the basic idea is that a smart beta fund is a passive fund that follows a particular investment style such as value, size or momentum. These styles are often known as factors, so 'smart beta' is also known as factor-based investing.

An alternative definition is that smart beta funds are passive funds that aren't weighted according to the market caps of the companies in the index. For example, if Vodafone currently comprises 6% of the FTSE 100 index, then Vodafone should comprise 6% of a FTSE 100 passive tracker fund. But a UK value ETF will be weighted towards companies that look cheapest as measured by price-to-book, dividend yield or another similar measure.

The future

It looks almost inevitable that there will be further substantial growth in the smart beta sector in the years ahead, and that's why a new independent publication is so needed. We hope that 'Beyond Beta' will fill that gap and the first edition looks very strong. You can see all the latest smart beta ETFs launched around the world and there are also tables revealing the top-performing ETFs in the US and UK this year.

Articles include a history of smart beta as well as a piece by Angelo Ranaldo and Rainer Haeberle which argues that most ETF indices offer active investing on the sly and that applies to smart beta indices. You can also read why equal-weighted indices (where stocks all have the same weighting in an index) outperform market-cap weighted indices. Apparently equal-weighted indices decline more in bear markets, but they beat their market-cap weighted peers in bull markets.

We also have an article outlining the sceptic's case against smart beta - entitled 'why smart beta is a fraud.' Richard Wiggins argues that many smart beta indices are built on 'pseudoscience' and that many smart beta ETFs can be recreated using cheaper alternatives.


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