While there is still a lot of debate about what smart beta is and what it should be called, the reality is that the term is now in common use and is applied to a wide universe of products. Source has published a whitepaper on smart beta, seeking to clarify the role of these products in a portfolio.
In practice, the term “smart beta” is used for almost any passive product that deviates from a standard market capitalisation-weighted benchmark. Methodologies vary widely, with products that filter and/or weight constituents according to many different market characteristics. With such a broad category, we find it helpful to divide smart beta into two distinct types: tools and strategies.
When investors look at any smart beta product, they should be asking themselves how it would fit into their portfolio. Has it been designed to stand on its own as a core portfolio holding? Or is it useful more as a tactical tool, to give an existing portfolio a different slant or as part of a core-satellite approach? Single factor products tend to fall into the tool categorisation, while strategies tend to be more diversified.
In the whitepaper, Dr Christopher Mellor, Head of Equity Product Management at Source, seeks to dispel some of the myths surrounding smart beta and explores the practical ways in which investors can use the products.