Next Stop for Indexed Investing: Smart Beta ETF (2)
(iii) Classification
The Smart Beta Index can be classified on two dimensions: sampling and weighting. Sampling is based on single-factor or multi-factor indicators that significantly and effectively isolate market characteristics in order to obtain an excess of that factor. returns, such as value metrics, growth metrics, dividend metrics, blended financial metrics, etc. In terms of weighting, the traditional market capitalization weighting has a systematic inherent flaw, over-allocating overvalued stocks and under-allocating undervalued stocks. When the relationship between weighting and market capitalization is cut off or partially cut off, there will be a certain "smart" effect, i.e., relative market capitalization. Index, under-weighted overvalued stocks, over-weighted undervalued stocks, and such weightings include equal weighting, low volatility weighting, and dividend yield weighting.
(iv) Application
Smart Beta can be used for portfolio construction and as a new performance benchmark. When constructing portfolios, Smart Beta can be used as both a tactical and strategic allocation tool. As a tactical tool, Smart Beta segments overall market risk into specific risk subsets. Investors can use Smart Beta to quickly access specific risk exposures or Adjust the overall portfolio exposure level. As a strategic allocation tool, investors can choose a multi-factor Smart Beta strategy that diversifies to spread out the various factors by risk with a view to achieving consistent and stable outperformance of benchmark returns. In terms of performance benchmarks, the Smart Beta index replaces the traditional market capitalization index as a measure of active manager performance over time. The performance benchmarking of the performance of the company will raise the appraisal standards to some extent, which will set a new rate level that could reduce the cost of delegated administration.
In my opinion, Smart Beta's future directions for further development include the following.
Mine and expand the strategy factor
The vast majority of Smart Beta strategy factors on the market today come from academic research, and such factors are discovered by research and made public. The validity of the factors has gradually declined after the release. In the future, with the breakthroughs in artificial intelligence technologies such as big data, cloud computing, and machine learning, further exploration and development of new validity factors will Become possible.
Composite factor strategy
The Smart Beta index is currently dominated by single-factor or two-factor stock selection. It is expected that in the future, more international institutional investors will select two to five Smart Beta strategies in the same portfolio. In order to further diversify the risk, expand the sources of excess returns, and improve the stability and durability of excess returns.
Intelligent switching of strategy factors
At present, most of the Smart Beta are static factors. If we can effectively switch the factors according to the market environment and automatically adapt to the new market environment, this is a direction of development with great challenges.
Trinity: Active, Passive and Smart Beta
Smart Beta Alternative to Active or Passive Strategies? Not, and even in some cases the three should complement each other. Today's investors not only focus on risk and cost, but also try to find the right asset allocation model for their portfolios, even in less optimistic markets. conditions, but can also expect to earn superior returns. Thus, the combination of Active, Passive and Smart Beta allows investors to truly diversify their investment strategies to better The challenge of meeting future uncertainties.
