Smart-Beta ETF No. 3: Guggenheim S&P 500 Equal Weight ETF (RSP)
AUM: $9.91 billion
Why: Smart-Beta ETF Bought By People Who Might Not Love Smart Beta
The Guggenheim S&P 500 Equal Weight ETF (RSP | A-79) is an odd bird. It’s not really “smart”—the fund simply holds an equally weighted exposure to each stock in the S&P 500 and rebalances quarterly. There is no intentional factor bet, although it certainly skews toward small- and midcaps. It doesn’t necessarily have an elaborate academic theory behind it, although it preys on the concept of rebalancing and reversion to the mean.
Yet RSP has come to hold a special place in investors’ hearts. It is large, extraordinarily liquid, and owned by a large number of investors who ordinarily wouldn’t own a smart-beta ETF.
I speak with a lot of investors about why they own smart-beta ETFs, and they usually trail off about the theory behind the ETF. But with RSP, they just like it. They like that it buys low and sells high, and they tend to rotate into it when the market is ripping. It belongs on this list if for no other reason than it broadens the tent of people who consider themselves in the smart-beta game.
Smart-Beta ETF No. 4: iShares Dow Jones Select Dividend Index Fund (DVY)
AUM: $16.26 Billion
Inception Date: 11/3/03
Why: Packaged Dividends Into ETFs; Married The Old And The New
People like to think that “smart beta” is a new idea, but the truth is that investors have been looking for factors and strategies that can beat the market since the dawn of investing. Take dividends.
Dividends have been considered one of the keys to strong performance since … well, forever. Legendary value investor Benjamin Graham wanted to see 20 years of continuous, uninterrupted dividends before he would buy a stock, and significant academic research has shown the value of dividends to long-term returns.
The iShares Dow Jones Select Dividend ETF (DVY | A-67) was the first ETF to make capturing dividends an explicit goal. Successful out of the gate, DVY spawned an entire industry of dividend-capturing ETFs, marrying the latest fund technology with the oldest investment philosophy on the books. Tens of billions of dollars have followed.
Smart-Beta ETF No. 5: PowerShares FTSE RAFI US 1000 Portfolio (PRF)
AUM: $4.28 Billion
Inception Date: 12/19/05
Why: Backed by Rob Arnott's Academic Efforts And Aggressive Promotion, This ETF Jump-Started The Era Of Modern Smart-Beta Investing
As important as value and dividends funds were in the evolution of smart beta, the PowerShares FTSE RAFI US 1000 Portfolio (PRF | A-85) probably signals the kickoff of the current smart-beta vogue.
The fund was the first ETF to track an index developed by Rob Arnott’s Research Affiliates. Arnott is an academic practitioner whose Financial Analysts Journal article, “Fundamental Indexation,” threw down the gauntlet against market-cap-weighted portfolios. Published in early 2005, the article laid out a convincing case against traditional indexing, suggesting it systematically overweighted the most overvalued components in an index.
Arnott championed this theory aggressively to financial advisors and institutional investors alike, and got folks thinking about the potential shortcomings of traditional indexes. Sometimes referred to as the “godfather of smart beta,” Arnott’s efforts helped pave the way for the boom that followed. PRF was his first big entry into the ETF market.