Destroying Smart Beta: Part 1

April 08, 2014

Series of blogs will examine how to get rid of a dumb term like ‘smart beta.’

This blog is the first installment of a series examining smart beta and how to think about the expanding phenomenon more clearly.

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?

As the director of research at ETF.com, I am like a zookeeper, tending to a menagerie of beautifully varied creatures. There are, figuratively speaking, peacocks platypuses and gorillas, each filling a specific niche of the ETF ecosystem. Every fund has nuances and features that allow it to adapt to its market.

If you knew ETFs like I know ETFs, you would refuse to even try to count smart-beta funds. That’s because the features of headline smart-beta funds end up being common throughout the ETF landscape, popping up as adaptations to regulation and market conditions, without any promise of risk-adjusted outperformance.

I look and I see equal weighting in laddered commodities and bond strategies, S&P’s industry indexes, social justice funds, and hedge-fund copycats as well as in funds like the Guggenheim S&P 500 Equal Weight ETF (RSP | A-75)—which advertises “reduced volatility and improved risk efficiency.”

And if you knew ETFs like I do, you would encourage people to understand each fund’s strategy, and to group funds by common features rather than by appearances. You would work hard to educate people to understand each fund’s structure and properties, and how it might act in various environments.

You would not waste your time counting something you cannot define; namely, total assets under management in smart beta.

Want to try it? What do you think is the biggest smart-beta ETF in the U.S.? For starters, here’s a list of the 10 biggest equity ETFs by assets at the end of the first quarter.

How many of these are smart-beta funds?

Smart Beta Wrecking Ball Top 10 Funds Table

Depending on how well you know these funds, and on how you think about smart beta, your answer could range from zero to six. If you picked VIG, the payout-tilted Vanguard Dividend Appreciation ETF (VIG | A-67) for the No. 1 slot, you’d be in for a surprise.

Many of our favorite “dumb” funds, it turns out, have smart-beta features.

 

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