Key Smart Beta Questions To Ask

Charles Schwab’s Tony Davidow offers a guide to navigate the quickly crowding smart-beta ETF segment.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy
Smart-beta ETFs have been around for at least a decade, and as a segment, they are one of the fastest-growing pockets of the ETF market today. ETF investors are finding that distinguishing between the rising number of strategies that strive to beat market-cap-weighted approaches is an ever-growing challenge.

Some estimate there is at least $500 billion in assets tied to some 900 smart-beta funds globally. But there are seldom two smart-beta ETFs that go about slicing and dicing the market the same way. There are equal-weighted funds; low-vol ETFs; fundamental strategies; etc. They can be grouped by outcomes, such as return-oriented or risk-oriented ETFs. They can be factor-focused, or multifactor. You name it.

All Smart-Beta ETFs Not Built The Same

“A lot of folks fall into the trap of assuming that all smart-beta strategies are built with the same academic rigor,” Tony Davidow, alternative beta and asset allocation strategist at the Schwab Center for Financial Research, said in a webcast.

“We’re hearing more and more from clients, not about how these strategies work, but they are asking, ‘How do I incorporate them into my portfolio? How do I distinguish among all the strategies in the space?’” he said.

To Schwab, the due diligence process isn’t a simple one, and it isn’t getting simpler, as more strategies from various providers come to market.

Key Questions To Ask

With that in mind, Davidow offered some questions investors should ask in their search for the right smart-beta ETF, and some of his thoughts associated with each of them:

1. What are smart-beta strategies?

Smart beta is simply a catch-all term used to define nonmarket-capitalization-weighted strategies. Many different strategies fall under this umbrella, including equal weight, low volatility and fundamentally weighted strategies, among others.

2. Why have these strategies become so popular?

These strategies originally became popular with institutional investors. In recent years, they’ve been embraced by advisors and retail investors because they’re now easily accessible through mutual funds and exchange-traded funds, and many of these strategies now have a track record that tends to support the historical research.

3. Are all strategies really “smart”?

Not all smart-beta strategies are created equally. It’s not wise to group all smart-beta strategies together and expect the same outcomes. We believe it’s important for all types of investors to dig deeper when considering if smart beta—and which type—is appropriate to help them meet their investment goals.

4. How can investors distinguish among the myriad strategies?

Although they’re often grouped together, smart-beta strategies can differ depending on the underlying index construction methodology. Investors should start with a short checklist:

  • What is the methodology for screening and weighting securities?
  • What is the underlying index?
  • What are the sector allocations, and does this introduce some unintended risks?
  • What is the market capitalization breakdown of the strategy?
  • What are the allocations across value, growth and core stocks?

5. How are smart-beta strategies different from market-cap strategies?

Market-cap strategies provide the largest weighting to the largest companies based on the stock’s market capitalization. Fundamental index strategies break the link with price and screen, and weight securities based on factors like sales, cash flow, dividends and buybacks.

6. How should investors allocate among active, market-cap and smart-beta index strategies?

We believe these strategies can serve as a valuable complement to market-cap and active management strategies. Investors should begin by understanding the role each strategy plays in a portfolio.

For more information, see’s Smart Beta-Channel & Screener.

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.