What is “Smart Beta”?

I had a client ask me about “smart beta” investing recently because she saw the term in an article. I told her I didn’t know what it meant.  I had to look it up. The term “smart beta investing” is a made-up term that is supposed to help explain an investing approach, but it just confuses people. Happens all the time in this industry. More on this later.

Briefly, smart beta is passive investing with a twist. The twist is meant to either improve returns, increase diversification, reduce volatility or some combination of these goals.

For example, there are many mutual funds and Exchange Traded Funds (ETFs) that track the S&P 500 index. A smart beta fund might invest in only the value companies in the S&P 500 index or might buy only the companies in the S&P 500 index that pay larger dividends. A smart beta investment approach can be used for stocks, bonds, commodities, real estate, and many other assets. In essence, smart beta attempts to take advantage of investment inefficiencies and thereby improve investment returns.

It turns out smart beta investment strategies are popular. According to an April 2021 article in Investopedia, 77 new smart beta ETFs were launched in a twelve-month period in 2018 and 2019. That’s about 1/3 of all the new ETFs that were launched. In the same article, Investopedia states smart beta funds held over $880 billion in assets.

Is a smart beta fund for you? It may or may not be. It depends on your investment goals, time horizon, risk tolerance and overall investment strategy. Please consult with a competent financial professional to discuss any smart beta ideas you might want to pursue.

Now, about confusion in the investing world. Carl Richards is a popular writer in the personal finance area and focuses on the behavioral side of personal finance. He recently wrote about the tremendous amount of noise in the personal finance space. He wrote:

Think of all the financial pornography out there, think of the number of dental offices that have CNBC playing in the background, think of the USA Today Money section. And almost all of it is noise. Almost none of it is actionable.

Occasionally, we get information—you know, facts and figures. But most of that is useless because it doesn’t matter to you, or it is beyond your control anyway.

The noise is worthless, the information is useless, and then every once in a while, there is a little teeny tiny speck that might be useful.”

Richards’ point is we can ignore most of what we read/watch/hear in the personal finance world. Most of it is useless noise. Smart beta is in this category. It sounds cool because it has the word “smart” and “beta” (a Greek letter). However, how important is it to you in achieving your overall financial goals? Probably not a great deal.

When you come across a new phrase or idea in the personal finance area I suggest you ignore it. If you like to dabble in new personal finance ideas, then fine. Some people like to go to the circus or Las Vegas too. However, to be successful in the personal finance, you only need to follow a few simple and time- tested principles and rules. For example, set goals, spend less than you earn, save early, draft estate documents. have insurance for large risks and hold a diversified portfolio. Basic and simple rules for personal finance success. And not one of them requires you to use smart beta investing strategies.

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