- Transparency—too broad, fails to make meaningful groups
- Rules based/quantitative—too broad, fails to make meaningful groups
- Thematic/specific segments or objectives—too broad, fails to make meaningful groups
- Noncap weighting—results are unacceptable to the ETF community, because too many oddball funds are included
- Captures risk premia/factor exposure—results are unacceptable to the ETF community because factor exposure appears in too many funds
- Superior risk-adjusted returns—results are unacceptable to the ETF community because only a tiny fraction of designer funds produce statistically significant excess returns
- Improves portfolio diversification—results are unacceptable to the ETF community because many designer funds are highly concentrated.
There is no No. 8. We’re done, and so is our hope of defining smart beta.
From now on, if we have to reference this undefinable term, when, for example, the Wall Street Journal asks us “How many smart-beta funds launched in 2014?” we will stigmatize it with quotation marks. Smart beta is dead. And “smart beta,” an occasionally necessary journalistic evil, will wear the cone of shame.
In my next blog, the final one of this series, I’ll lighten the mood with constructive suggestions for how to best describe “smart beta” strategies, from the plain vanilla to the intricately complex. And I’ll also talk about how ETF.com will handle questions from folks who want to talk about this undefinable trend.
This blog ends with a moment of silence, as we pay our respects to the term “smart beta.” We can’t count what we can’t define, and we can’t define smart beta in an ETF context.
At the time this article was written, the author held no positions in the securities mentioned. Contact Elisabeth Kashner at [email protected].