The inquiries are coming in faster and harder than ever before. Everyone wants facts and figures about so-called smart-beta funds: How many are there? What’s the biggest one? What’s the total number of assets under management in smart-beta funds? How many launched in 2013?
If you knew ETFs like I know ETFs, you would refuse to count smart-beta funds, because you would see “smart” features in all manner of funds, even those not deliberately designed for risk-adjusted outperformance. You would see factor exposure in small-cap funds and utilities, equal weighting in industry funds, social justice funds and hedge-fund copycats. Every fund has nuances and features that allow it to adapt to its market.
Instead of wasting your time counting something you cannot define, you would encourage people to understand each fund’s strategy, and to group funds by common features rather than by marketing claims. You would work hard to educate people to understand each fund’s structure and properties, and how it might act in various environments.
A quick quiz will introduce the difficulty of defining smart beta.
Figure 1 provides a list of the 10 biggest equity ETFs by assets at the end of the March 31, 2014.
How many of the funds in Figure 1 are smart-beta funds?
Depending on how well you know these funds, and on how you think about smart beta, your answer could range from zero to six. Many of our favorite “dumb” funds, it turns out, have smart-beta features.
- The SPDR S&P 500 ETF (SPY | A-98) and the iShares Core S&P 500 (IVV | A-98) both share an index that screens components for profitability, just like the index underlying the FlexShares Quality Dividend ETF (QDF | A-78) does.
- The PowerShares QQQ (QQQ | A-53) has a tier of equally weighted securities, partially mimicking RSP, thus giving it a smart-beta tilt to small-cap stocks.
- The iShares Russell 2000 ETF (IWM | A-82) accesses the small-cap premium—that’s factor investing.
- The iShares Russell 1000 Growth ETF (IWF | A-89) has momentum exposure—that’s also factor investing.