An Insight into the Functioning of Smart Beta

Total Return Indices are the most popular form of investment that people have been undertaking since long. Be it the Dividend Index or any other index, you get to investment in the way you crave and the way you consider to give you the ultimate benefit. Here we will have an insight into the functioning of Smart Beta.

Advent of smart beta

The term smart beta has been coined by Towers Watson which is a professional services firm and is being used since 1970s. In 2003 the first smart beta ETF was launched. "Beta" is the term used to measure the volatility of the individual portfolio and not the entire securities market. These individual stocks are thereafter ranked in accordance to how these deviate from the beta value. On the other hand the word Smart implies the usage of the alternative methodology instead of pursuing the index's size-based allocations.

The investment strategy

The investment strategy of smart beta is so framed that it adds value in accordance to the index that are chosen strategically after weighting as well as rebalancing the companies on the objective factors. These thereby vary from the traditional counterparts as the former applies the sequence of objectives a well as the rules-based screens to the diverse each index component company. On the contrary the latter weight the constituents strictly on the market caps which is a little biased approach. Apart from this, the smart beta ETFs are considered to be the passive investment tools which are known to track the smart beta indexes, both chosen as well as the newly constructed indexes and the respective component companies.

Mitigating challenges

They try to mitigate the challenges of the market cap-weighted ETFs. Instead of simply using the size, smart beta makes use of the screens that are based on the fundamental analysis principles so as to determine which company ought to get what share.

All in all, this is an insight into the functioning of Smart Beta. You might have now got clarity of all those doubts that you had in mind related to the same.

Source : https://agriculturetrindex.jimdo.com/2018/01/18/an-insight-into-the-functioning-of-smart-beta/