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Smart Beta ETFs are a very new financial product that bring the prospect of market beating total returns, or market beating risk adjusted returns (less volatilility or drawdown , higher sharpe ratio).   The first Smart Beta ETFs were launched over 10 years ago but a small explosion in Smart Beta ETFs began in 2011, resulting in hundreds of new Smart Beta ETFs being launched and billions of dollars poured in. Currently there is about $429 billion in Smart Beta ETFs and Blackrock projects that smart beta ETF assets will reach $1 trillion globally by 2020 and $2.4 trillion by 2025.  All the big names in finance are jumping on board this trend, including Vanguard, the ‘passive’ investing giant, who recently made some SEC filings indicating the launch of some active ETFs.

Just like financial advisors, mutual funds, or passive ETFs, not all Smart Beta ETFs are created equal.  Smart Beta ETFs, while ultimately a positive, bring a lot of variation, junk, hype, and high fees to unknowing  investors.  I believe the best investor,  is an educated investor who knows and understands exactly what they are investing in.  BUT with everything happening in the Smart Beta world, and the relatively high level of financial knowledge required to understand Smart Beta, it’s hard to become an educated ‘smart beta investor’ and understand it all.  That is why I have made this site.

As just a regular investor going down the Smart Beta road, I’ll share my knowledge with you.  No cheap suit and sales gimmick.  Just a guy with a decent financial education and mild math brain, helping you become a better investor!  Find out more about me.


Here’s What You Need To Know About Smart Beta Investing:

Quantifiable measures of stock selection and weighting have shown to either deliver excess returns or control risk in rigorous academic research.

These academically based measures, known as ‘factors’ have been wrapped into ETFs which I refer to as ‘Style’ and ‘Risk’ based Smart Beta ETFs.  Learn more about:

Smart Beta ETFs  (usually) provide exposure to a factor in a transparent, systematic, quantifiable, and low cost manner. 

Beating the market cap weighted indexes is not easy, but many excellent investors have beat the index regularly.  Rather than relying on an active manager selecting stocks, either on a whim/feeling, or using some methodology, Smart Beta ETFs take a systematic approach and stick to tried and true selection methods.  This comes with transparency and lower fees (than mutual funds) and offers your best bet for alpha.  Smart Beta ETFs are also extremely tax efficient and greatly reduce the tax burden often associated with high turnover trading strategies in a taxable portfolio.

Successful mutual fund manager returns have shown to be nothing more than exposure to a factor.

Before Smart Beta we had mutual funds.  Many mutual funds would flop, while a few would go to deliver extraordinary returns.  It is now becoming more evident, that the managers of successful mutual funds, were likely just benefiting from exposure to a now established factor.  Research by Carhart 1997 concludes:

Using a sample free of survivor bias, I demonstrate that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds’ mean and risk-adjusted returns.

Learn More:

 Smart Beta Strategies Require Commitment

Not all strategies work at all times.  While many factor based strategies have been down to deliver a return premium, the premium isn’t consistent.  In otherwords, you won’t be the market year after year.  Recently value strategies have been lack luster, while momentum is hot with returns.  Just the same, market cap weighting buy and hold had went no where from 2000 – 2010.  Any with any type of investing, commitment and diversification is required for smart beta investing.

Don’t get too excited about Smart Beta ETFs

I believe the development of Smart Beta ETFs and strategies is a positive for the investing community as a whole.  Not all Smart Beta ETFs are all created equal though.  Many have high fees, relative to what they deliver.   Others could be subject to backtest fitting, or flawed data.  Even worse some could fall victim to mis-management.   I’ve made this site to educate investor of all levels on these things

Suggested Reading:

What Smart Beta ETFs should you invest in?

I recommend checking out the Under The Hood section.

Before diving in to Smart Beta and this site it is important that you have a solid grasp of finance & investments:

  • How stocks and bonds work.
  • Asset class correlation.
  • Time value of money.
  • Cumulative returns, total returns, excess returns.
  • Historical asset class returns and volatility.
  • Financial ratios and stock screening (price to earnings, cape ratio, debt to quite, earnings to free cash flow)

If you don’t understand ALL of those terms with crystal clarity, you need to do some studying to really understand Smart Beta investing.  I recommend you take this course from Udemy to brunch up on financial principles before diving into Smart Beta.

If you’d rather simply invest get some sleep instead of study stock markets and nerdy math stuff, or read this website — that is PERFECTLY fine.   For you, I recommend investing with a robo-advisor like Betterment — Robo-advisors are actually EXCELLENT.  Robo-advisors like Betterment will ultimately deliver better returns than many (if not most) smart beta strategies, all while keeping your mind off investments.

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