Defining smart beta – a tough challenge

Comparing apples with apples is important – also in asset management. But which sorts of apples are out there? In the smart beta space aka “factor investing” are thousands of definitions and understandings of what smart beta is and how it defines. So it is not possible to find the one fits all definition. But to keep it simple let us concentrate on the aims of smart beta. It seeks to improve returns, reduce risks or provide a systematic factor exposure. It combines characteristics of both passive and active investing. Russell defines it as “transparent, rules-based indexes designed to provide exposure to specific factors, market segments or systematic strategies”. We like this definition as well as the separation of the smart beta world into two segments: “Alternatively weighting strategies and factors”.

The F-word

Factors are the heart of every single smart beta strategy. Understanding that different factor exposures are the key driver of risk and return is essential. Every security and so every portfolio is chased by different factors. For example, energy stocks tend to move together as they are highly dependent on the development of commodity prices. Typical factors are:

  • Value
  • Size
  • Momentum
  • Low Volatility
  • Quality
  • Dividend Yield

We want to highlight the relevant facts associated with each of the factors listed above. Also, we highlight advantages and potential disadvantages or shortcomings with each of these factors. TO BE CONTINUED SOON.