In our opinion, Smart beta is a many splendored thing.
After all, smart beta portfolios are carefully constructed baskets that rank stocks by traits other than their market value, the standard methodology employed by traditional benchmarks, such as the Standard & Poor’s 500.
These innovative financial products focus onfactors such as value, momentum, dividend yields, volatility or other metrics that have historically delivered market-beating performance and reduced portfolio risk.
Investors interested in smart beta often face two fundamental questions. Which factor should one focus on? And should an investor choose a single-factor smart beta ETF or a multi-factor product?
Sara Shores, Head of Strategy for BlackRock’s Factor-Based Investments, recently published an illuminating post on how to think about these questions.
Much of course depends on one’s financial goals, risk profile and time frame.
That said, here’s how she differentiates between the two.
“Single-factor strategies seek to capture individually rewarded style factors.Value, size, quality andmomentum strategies can help investors outperform the market, whileminimum volatility strategies seek to reduce risk.
Because the performance of each factor may vary in different economic cycles, single-factor strategies can be used to express tactical portfolio tilts.
Multifactor strategies combine factors into one holistic, broadly diversified strategy that can potentially outperform the broad market.”
Single-factor smart beta funds can make up for a glaring weakness in a portfolio such as insufficient exposure to small-cap stocks or dividend plays.
These products can also be used tactically. Image using a quality-focused smart beta product late in a business cycle when corporate earnings are under pressure.
Multi-factor smart beta strategies can offer investors greater diversification.
Financial metrics such as value, momentum, quality and size have historically low return correlations. So you may have a better chance for better returns overall.
In our view, Smart beta investment strategies are one of the most powerful trends in investing with assets under management now topping $500 billion.
If you think this style of investing might be worth a try, you might want to take a look atCovestor’s Smart Beta portfolios.
Here are some other advantages worth considering:
Low Cost: With an 8 basis point management fee, Covestor Smart Beta portfolios are competitive with existing products in the marketplace.
Low Minimums: Portfolios have low investment minimums of just $5,000 through use of fractional shares.
Factor Tilts: These portfolios are designed for exposure to desirable stock characteristics, or factors, such as robust growth, valuation, quality, and dividends that have been back tested. Portfolios are also well diversified across sectors.
Rules-Based: The Covestor Smart Beta portfolios have filters to screen out undesirable stocks and a repeatable rules-based framework to determine position allocations.
Auto-Rebalancing: Portfolios are rebalanced quarterly; stocks sold are replaced by new ones with more attractive characteristics.
Transparency: Investors have immediate, online access to information on holdings, trades and performance.
Interested in finding out more? You can learn more about Covestor, or try our services with a free trial account.
Disclaimer: Covestor’s Smart Beta Portfolios are not Exchange-Traded Funds or mutual funds but are portfolios made up of individual stock holdings. You may block the trading of specific stocks in your account. These portfolios mainly invest in stocks and may not be suitable for all investors. You may lose all or part of investments in these portfolios, and their past performance is no guarantee of future results. You may find additional information on the risks, conflicts of interest, applicable brokerage commissions, fractional shares, and limitations on investments and divestments associated with these portfolios (along with Covestor’s full disclosures) on the Forms and Agreements page at ibkram.com. Covestor Ltd. is an investment advisor registered with the Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or training. Brokerage services are provided to Covestor clients by Interactive Brokers LLC, an SEC-registered broker-dealer and member NYSE/FINRA/SIPC and a Covestor affiliate.
- IB Asset Management is a pioneer in online investing. IB Asset Management offers a variety of portfolios, including the Smart Beta portfolios, which are managed by IB Asset Management's Chief Investment Officer and Investment Management team. The “Smart Beta” approach to portfolio construction is grounded in academic research. The goal is to achieve an alternative risk-return profile which is more attractive than a simple capitalization-weighted index such as the S&P 500. IB Asset Management Smart Beta portfolios are designed to provide systematic exposure to a fundamental factor or combination of factors. Portfolios are constructed using a rules-based approach and offered at a relatively low cost.