Smart Beta Presentation

Slide 1

The broadest definition of smart beta is any portfolio construction process that doesn’t rely on price(market cap) to select and weight stocks.

These are some examples of smart beta weighting, weighting by fundamentals, weighting by volatility, weighting by dividend, weighting by momentum.

Fundamental – company size, sales, cash flows, book value

Dividend – dividend, consistency of paying

The goal is to obtain alpha, lower risk or increase diversification in a cost effective manner. Cost is cheaper than active management and slightly more expensive than market cap passive funds.

Research Affliates is widely credited with introducing the first fundamentally weighted index in 2005.

Slide 2

The more traditional passive investing approach is the market cap-weighted index like the S&P 500 index. It is cheap and simple.

How you weight your portfolio is like this: Company A has the highest market cap which means that it would occupy the biggest weight in your portfolio. Company C has the lowest market cap which means it would occupy the least weight in your portfolio. The problem with this is that sometimes stocks are undervalued or overvalued. As the prices go up for overvalued companies, your portfolio will have a larger exposure to that company. Small companies that are poised for growth will actually be given smaller allocations in the portfolio.

Slide 3

So this is the performance of this year’s S&P 500 ETF market cap index until September. It has been falling this month. The whole market is not doing too well. If your portfolio is a smart beta strategy based on low volatility (underweights the most popular stocks), then chances are that your portfolio might lose less money than the general market.

Slide 4

Bloomberg has done a research comparing the historical performance between smart beta factors and the S&P500. As you can see the smart beta factors have traditionally done better than S&P 500.