It’s Active, it’s Passive — no, it’s Smart Beta


Few in the investment world can deny the continuous debate surrounding active versus passive. While active investments still make up the lion’s share of overall fund assets, the preponderance of flows in recent years have been into passive mutual funds and ETFs. One category of ETFs that has attracted increasing attention and flows is smart beta.

By focusing on those factors that historically have positively impacted performance on a long-term basis, smart beta funds try to provide an element of active investing in a systematic, rules-based manner, at passive level fees.

Such factors often include:

1.Value style – value

2.Smaller capitalization companies

3.Lower volatility stocks

4.High quality companies


6.Dividend paying

While there are supporters and detractors of these funds, they have increased in popularity. Although they still comprise a relatively small share of overall ETF assets, 2016 inflows were at a record high. According to BlackRock, global inflows as of November 20, 2016, were already over $45 billion, far surpassing the $30 billion inflows into smart beta ETFs for all of 2015.

Caution, however, as not all smart beta funds are created (or perform) equally. A 2016 study from Markov Processes International, commissioned by Institutional Investor found significant dispersion in returns between the top performing value focused funds and the bottom performing ones over a one-year and three-year period. In multi-factor smart beta funds, the deviation in results was even more significant.

Depending on which angle an asset manager is coming from, the rationale for smart beta funds is a little different. For an active manager, they can offer a semi-passive type of investment to combat outflows while still supporting the active management position. For passive managers, it’s another way to attract active assets with an “enhanced” passive strategy. Either way, smart beta strategies are benefiting.