Smart Beta ETF Investing: Access Potential Drivers of Return
Smart beta investing seeks to provide a cost-effective, rules-based strategy to potentially outperform a traditional market cap-weighted benchmark. Smart beta ETFs are designed to capture specific factors, or investment characteristics, that drive risk and return — and can do so in a relatively low-cost, systematic manner.
Why Focus on Factors?
Factors—characteristics such as value, quality, size, momentum, volatility and dividend yield — are one of three elements that can drive portfolio returns. Extensive research has shown that factor exposure accounts for 50% to 80% of a portfolio’s excess return above a market cap-weighted benchmark.1
Why Choose Smart Beta ETFs?
Investors use smart beta ETFs to pursue a wide range of goals:
Supplement a traditional index portfolio by accessing factors or risk premia that drive alpha
Mitigate Downside Volatility
Enhance risk-adjusted returns by gaining exposure to factors that tend to perform relatively well during market downturns
Search for Yield
Increase income-generation by tilting a portfolio toward higher-yielding assets
Seek outperformance through vehicles with lower fees and better tax efficiency than actively managed strategies
Access Uncorrelated Returns
Improve portfolio diversification by increasing exposure to factors with lower correlation to the broader market
Ways to Use Smart Beta ETFs
Screens/Tilts to Capture Factor Premia
Six primary factors have historically outperformed the market cap-weighted benchmark. Harnessing the potential of smart beta requires understanding the screens or tilts that can be used to access these factors.
Investors can use single-factor smart beta ETFs to add exposures one at a time based on their market views or needs. This approach can make it easier to attribute performance more precisely and allow investors to tailor the implementation to their specific beliefs and objectives.
Multi-factor smart beta ETFs combine two or more factors to capture a variety of factor risk premia and achieve a diversified exposure. This approach can allow investors to take advantage of diversification benefits across factors while potentially removing some of the performance cyclicality associated with single-factor investments. It also allows investors to address multiple objectives in a cost-efficient way.
State Street’s SPDR smart beta ETFs are built in partnership with the world’s leading index providers and fueled by expertise that comes from more than 25 years of smart beta experience. We pay rigorous attention to the many details — from design to execution — that can add up to important performance and diversification benefits for investors.
A Smart Beta strategy does not seek to replicate the performance of a specified cap-weighted index and as such may underperform such an index. The factors to which a Smart Beta strategy seeks to deliver exposure may themselves undergo cyclical performance. As such, a Smart Beta strategy may underperform the market or other Smart Beta strategies exposed to similar or other targeted factors. In fact, we believe that factor premia accrue over the long term (5-10 years), and investors must keep that long time horizon in mind when investing.
Investing involves risk including the risk of loss of principal.
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Diversification does not ensure a profit or guarantee against loss.
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