Since the launch of smart beta, approximately 10 years have passed since then. We are now about to start the second decade. Investors need to be aware of 5 things about smart beta.
- Origin – Although it is not a well-known concept, smart beta, which isn’t as well-known as Equity index, comes from Towers Waston, a professional service. However, institutional investors have been using this term since 1970. After 25 years of mutual funds, the smart beta index was launched around 2003.
- Measurement – Beta basically measures a portfolio and security. The beta is used to rank stocks based on how far they differ from each other. A stock that has a positive or negative beta return can have one of two options. However, when smart is added to the equation it will change everything. Smart beta is an investment strategy that adds value to companies that are incorporated into an index solely on the basis their objective factors.
- Size – The smart beta index is very different from other types of indexes such as equity index. It is applied to basically a chain or objectives as well as the rule screens for every company’s component. Smart beta not only ranks companies based on these specific factors but also weighs them entirely on these factors.
- Smart beta Etfs – These smart beta ETFs were specifically designed to track and locate all new alternatives to weighing indexes. The smart beta ETFs are passive, but they can still be leveraged by systematic rebalancing.
- Fundamental analysis- Smart beta ETFs don’t blindly rank or weigh any company’s index. Instead, they use fundamental analysis to determine which companies will be given a larger share of the index. This fundamental analysis is based on fundamental principles and it gives the ETF the advantage of an enhanced risk profile.
A smart beta analysis investment can increase the number of options available to an investor. The investor must then evaluate the investment based on their investment time and investment horizons.
Investors should always consider smart investments and opt for smart beta EFTs. Many investors only see it as a strategy to increase their options and diversify their risk in various companies. However, smart beta strategies can be very useful to investors depending on their time frame and how often they invest in the markets or the purpose behind the investment.
A thorough evaluation is key to success in the stock market. Smart beta index can be misleading, but it still gives a micro view and not a complete picture. You should evaluate all options and choose the one that suits you best. This will help to increase your return.
These are the top five things investors should know about smart Beta Index. They need to understand how the index works in the stock exchange, the approach it takes and what one can do to reconsider their investment decision.
