Understand how smart beta usage is shifting

When it comes to using smart beta strategies, the question has evolved from “Do they work?” to “How do they work?” Learn about this dynamic and hear perspective from Tony Davidow, Vice President, Alternative Beta and Asset Allocation Strategist, Schwab Center for Financial Research.


It's actually very exciting for us, because I would tell you five years ago when we started doing these surveys and asking questions about smart beta, our clients didn't fully understand it. And the question was, do they work? And now the question has evolved to, how do they work? How do I distinguish between them?

And I think there are a lot of interesting findings in our surveys. But what we found is, a lot of our advisors are using them as replacements for active management.

Fundamental is a value oriented strategy, momentum is a growth oriented strategy. So, we actually recommend advisors actually spend the time to peel back the onion one layer at a time to understand, are there individual bets and biases that are introduced by one of these strategies?

What's the market capitalization? What's the value versus growth split in the portfolio? And ultimately, are they taking unintended bets that they should be aware of in advance, not afterwards? I think as an industry, we've done a very good job educating advisors on the value of single strategy solutions. In fact, we've provided guidance on how to incorporate market cap and fundamental. What's the role of momentum, how might they perform in a given market environment? And I think multifactor strategies are still relatively new. A lot of them are primarily relying on long-term historical back tests, not real data. And I think for a lot of advisors it's very confusing for them. So, I think each advisor should choose what's appropriate for them. But I think what I see is more and more advisors using the expanded toolbox that we've given them, rather than making the decision to farm that out to somebody else.

I think all indications are, it's going to continue to grow, continue to be a larger portion of advisors’ portfolios. But I do think there's areas of innovation still available for smart beta strategies. Areas like fixed income, where frankly, there hasn't been a lot to date. I suspect we'll see more of that in the future. Maybe areas like commodities or alternatives. So, if we think of this as an evolutionary step forward, the first generation was market cap indexes. Smart beta is just an evolutionary step forward, trying to determine are there better ways we can construct portfolios and provide better outcomes for clients? And I think that's a good thing.

I would just say it's a really exciting time. I think we've given clients and advisors a lot of better tools to build portfolios and now the premium has really shift for the advisor in determining, what's the best way to construct these portfolios?

Video Disclosure:
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment or tax advice. The type of investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources: however, its accuracy, completeness, or reliability cannot be guaranteed.

Related Content

Smart beta strategies are captivating more investors than ever before

Ten Things Everyone Should Know About Smart Beta Strategies

VIDEO: Demystifying smart beta