The Growth of Smart Beta ETFs

Bloomberg has an interesting but slightly confused article on the growth of “smart beta” ETFs. I think the article makes these funds out to be more sinister than they truly are.

Without question, the advent of ETFs has been very beneficial for individual investors. They offer broad diversification at low cost. Also, investors can pinpoint a particular sector far more easily than before.

The challenge for ETFs is to offer low-cost “strategy” funds. This is what’s also known as “fundamental indexing” or “smart beta.” Rather than portraying these ETFs as holding the miracle key to beating the markets, I think they should be presented much more clinically, as another tool that investors can use. In fact, they shouldn’t be presented as following indexes at all. No index is neutral.

The Bloomberg article seems to be overly focused on the fact that these funds aren’t properly weighted. Well, no strategy fund should reflect the market; that’s the point. I’ve already written on Low Vol ETFs, and I’d like to see many, many more products like this such as low P/E, high yield, low P/B, low EV/EBITDA, zero-debt stocks and so on. Ideally, the strategies should be mechanistic and rather dumb.

One big problem is that the fees on these smart beta ETFs tend to be much higher than traditional ETFs, as much as ten times higher. That needs to change.

Also. Ditch the name “smart beta.”

Posted by on March 6th, 2014 at 9:42 am


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