Smart Beta Mutual Fund and Smart Beta ETF

Smart Beta mutual funds and ETFs try to obtain higher returns by diversifying investment to reduce risk. This is not a traditional form of diversification. Most smart beta funds are not weighted by size or other traditional passive index factors, but are weighted by specific characteristics, such as value, growth, dividend growth, momentum, low volatility, or high quality. Smart Beta index fund managers try to replicate these key indexes that use custom screening methods to screen stocks. Turnover is usually low because these indexes are usually rebalanced every six months or every year to reduce expense ratios. Across the industry, these funds are a factor in the active vs. passive debate because they provide many advantages for custom stock selection at lower fees.

One of the biggest differences between Smart Beta mutual funds and ETFs is that there are very few mutual funds for retail investment. Most smart beta mutual funds in the market are constructed for institutional investors, and they are more of an enhanced and active smart beta category. Therefore, most of the innovations surrounding smart beta have been directed to the ETF structure. Let’s look at a few examples below.

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Mutual Fund

PIMCO RAE Fundamental PLUS (PXTIX) and DoubleLine Shiller Enhanced CAPE I (DSEEX) are two popular Smart Beta mutual funds.

PIMCO RAE Basic Edition (PXTIX)

PIMCO RAE Fundamental PLUS (PXTIX) seeks the total return of the S&P 500 index, supplemented by an absolute bond alpha strategy. Its one-year total return rate is 7.15%. The dividend yield is 4.44%. Its expense ratio is 85 basis points.

DoubleLine Shiller Enhanced CAPE (DSEEX)

DoubleLine Shiller Enhanced CAPE (DSEEX) seeks a total return that exceeds the Shiller Barclays CAPE US Sector Total Return Index. One risk here is that the fund invests up to 5% of its net assets in the securities of defaulting companies.

The fund’s one-year total return rate is 8.25%. The dividend yield is 2.19%. The expense ratio is 54 basis points. The minimum investment is USD 100,000, but the IRA investment amount is reduced to USD 5,000.

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Smart Beta ETF: Overview

Exchange Traded Fund

ETFdb.com provides a complete list of 506 smart beta ETFs as of October 2018.

Invesco DWA Healthcare Momentum ETF (PTH)

Invesco DWA Healthcare Momentum ETF (PTH) is one of the best performing Smart Beta ETFs over the one-year period as of October 24, 2018. The ETF is designed to track the holdings and returns of the Dorsey Wright® Healthcare Technical Leaders Index, which is sponsored by Nasdaq Inc.. The index uses the Smart Beta method to select 30 securities with strength characteristics through a customized screening method. This ETF is part of a series designed to determine the strength and momentum characteristics of various industries in the United States.

The transaction price of PTH is approximately US$81. Its one-year return rate of 24% is better than the S&P 500’s return rate of 8.78%. The assets under management of the fund are US$289 million. The expense ratio of the ETF is 60 basis points.

Bottom line

With many companies innovating and launching new funds with ETF and mutual fund structures, the world of Smart Beta is constantly evolving. As of October 2018, it was obvious from the top five funds managed by this strategy that investors were interested in smart beta strategies for core holdings:

  • QUAL iShares Edge MSCI US Quality Factors ETF
  • SCHG Schwab U.S. Large Growth Stock ETF
  • IJT iShares S&P SmallCap 600 Growth ETF
  • HDV iShares Core High Dividend ETF stock
  • IJS iShares S&P SmallCap 600 Value ETF

Blackrock and Vanguard’s investment in smart beta also shows that this strategy is worth paying attention to. According to a report from the Financial Times in November 2017, BlackRock and Vanguard, as the only two asset management companies with more than $100 billion in Smart Beta, are leading the development of Smart Beta funds. The investments of BlackRock and Pioneer also proved the attractiveness of this category. Therefore, when exploring new market allocations, expanding search due diligence to ensure and include some smart beta options becomes increasingly important for optimizing portfolio returns.

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