4 Views On Smart Beta ETFs

August 20, 2014

Data from ERI Scientific Beta’s July report recently showed that minimum volatility strategies in the smart beta sphere are most popular when it comes to year to date risk adjusted performance.

Year to date absolute returns rose to 6.39 percent, with returns of 1.54 percent above the market cap benchmark, the highest results in the analysis of smart beta strategies, according to the data.

A lot has been made of so-called smart beta strategies in the last couple of years with several smart beta exchange traded funds being launched as a result. But how effective are smart beta ETFs? Do they do the job they are employed to do and do they give investors good value for money?

ETF.com’s European editor Rebecca Hampson asks four industry experts for their view on smart beta ETFs:

Alan Miller, founding partner and CIO SCM Private

Adam Laird, passive investment manager at Hargreaves Lansdown

Allan Lane, managing partner at Twenty20 Investments

M-J Lytle, chief development officer at Source ETP


ETF.com: Are smart beta ETFs a way for the industry to make more money?

Alan Miller: It depends. The smart beta ETFs are essentially a middle ground between low cost conventional indexes and expensive active management. They tend to be more systematic and less emotional than conventional active management. However there is a wide variety of ETFs and whilst some are based on sound proven concepts, many seem to be based on random processes that might have worked recently but whose success is unlikely to be repeated.

Adam Laird: Smart beta definitely costs more at the moment. It’s natural for index providers or product issuers who have worked to build innovative indices to want to charge a premium. There’s a balance here and some smart beta is too expensive – for example buying a developed equity product with fees over 0.75 percent. If investors can buy themselves active management for the same cost, they need to think hard about why to opt for a smart beta index.

Allan Lane: It’s funny if you think about.  Smart beta is a product of our times, as an ETF they are democratic and very much from the Google generation.  Yet on the fees front, they cost more than the standard ETF products. In the long run, though I suspect these higher fees will not persist.

M-J Lytle: Delivering exposure to well known benchmarks is heavily commoditised and therefore one of the natural points of differentiation becomes headline management fees. By definition, many smart beta strategies differentiate themselves by offering exposure to investment strategies that strive to offer outperformance versus standard benchmarks. If the strategy delivers on its objective, investors are naturally willing to pay a bit more than they do for replication of standard benchmarks because they can offset the fees against the outperformance.



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