The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”
Smart Beta

Is Smart-Beta Actually Smart?

The new term designed to catch the imagination of investors is “Smart-Beta”. It sounds so “smart.” But is it, or is it just another marketing gimmick?

Investopedia defines Smart-Beta this way:

“Smart-beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. Smart-beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart- beta is linked to a desire for portfolio risk management and diversification along factor dimensions as well as seeking to enhance risk-adjusted returns above cap-weighted indices.”

Now you know, or do you? In other words, you buy ETF’s that have low volatility. Every ETF has a different way of achieving that, such as investing in value stocks, etc. But when everyone piles into these value or low volatility stocks, their character changes and the risk and valuation increases to levels which is no longer “smart.” has an interesting article about the smart-beta strategy and how low-volatility, value, and high-dividend ETFs are becoming risky:

“Smart-beta ETF’s have enjoyed record inflows over the past year. The vast majority of new ETF’s launched in 2016 have been smart-beta products, which have attracted record flows, so far in 2016, according to ETFGI, an industry research firm.

Year to date, smart-beta products have seen net inflows of $16.15 billion. ETF’s designed to minimize volatility, often referred to as low-volatility ETF’s, gathered the largest net inflows with $14.32 billion, followed by those based on value stocks with $6.83 billion, and dividend-oriented products with $3.09 billion, according to ETFGI.

Cullen Roche, founder of Orcam Financial Group LLC, said investing in smart-beta ETF’s at this point is performance chasing. “When people chase performance they are chasing risk,” Roche said.”

We are always skeptical of these new “catch” tactics that Wall Street invents to get your money. Even the analyst who came up with the concept, our colleague Rob Arnott, is now warning investors about the drawbacks of a ‘smart-beta” strategy because of overvaluation..

If you want a ‘smarter’ approach, check out, a membership program we created in a separate firm that allows you to replicate our model portfolios with a simple click of the mouse. Now that’s “smart.”

Read the full article here: