So what do hamburgers and price per pound have to do with equity-oriented long-only smart beta products? A lot more than you think.
Conventional wisdom is quite often wrong and misapprehensions can easily prevail, cemented perhaps by groupthink tendencies intrinsic to peer-influenced media.
The low-yield environment has many investors seeking new sources of outperformance. One development has been the growth of so-called smart beta investments, a $400 billion ETF market with a strong flow of funds from both institutions and retail investors. But are such funds really “smart” and do they truly have the potential to boost performance?
Some argue that smart beta products provide investors with an active approach to passive investing, whereas others believe that it is simply a catchall marketing term that describes any quantitative, rules-based investment strategy that can be formed into an index and sold through mutual funds or exchange-traded funds.
Smart beta is an impressive investment branding story. The name neatly encapsulates the idea of beating conventional indices consistently but with little effort and much lower costs. Intellectually seductive, it conveys the concept of market exposure that avoids the costs and behavioral failures of active managers.
Smart beta equity indices are no longer an exotic curiosity. Lionel Martellini, Professor of Finance at EDHEC Business School, offers a comprehensive overview of emerging smart beta strategies.
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