What is Smart Beta in in reference to ETFS?

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As you start going through a lot of the financial documents of collective investment vehicles, you will come across the term “Smart Beta”, particularly in reference to ETFs. In essence what it means is that the fund is a combination between active and passive management, therefore it is an upgrade from your traditionally “purely” passively managed ETFs.

The advantage of this is that you get the benefit of a fund manager readjusting the composition of the fund based on what they believe is in the best interest of the fund. Therefore , the fund will not exactly mirror the index which it is tracking, because the weightings may be readjusted by the fund manager, as they see fit.

This may be what some investors are looking for, as it is a hybrid between passive and active investing. The only setback is that the fund composition may end up changing substantially in weighting compared to what you initially purchased. It is only the weighting within the fund that can be changed by the fund manager and not the principles and methodology of the fund. Therefore, in accordance of this any weighting adjustments have to be done in accordance with the principles and methodology of the fund.

Initially smart beta ETFs had higher fees , but now their fees are more competitive and can challenge the more traditional funds.This due to their huge popularity and also the huge supply of smart beta funds. Traditionally funds are becoming less and less unpopular unless the composition of that fund is really best served without any further adjustments. Purely passive funds often miss out on the new opportunities in the market, and often can be so outdated that they no longer are representative of the new economic environment.

Therefore, depending on your own investing principles and objectives you can decide between the two forms of ETFs, in accordance to your needs.

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