Investors’ – and Wall Street’s – Love for ‘Smart Beta’ ETFs, in a Chart

May 30, 2014, 9:27 A.M. ET

Investors’ — and Wall Street’s — Love for ‘Smart Beta’ ETFs, in a Chart

By Brendan Conway

How do I love thee? Let me count the ways.
I love thee to the depth and breadth and height
My soul can reach, when feeling out of sight
For the ends of being and ideal grace.

Were those words penned by Elizabeth Barrett Browning, or by investors in smart-beta ETFs?

I’ll go with Browning, but the accompanying chart seems at first glance to make a different case. “Smart beta” is the term these days for any index-based fund which deviates from the market-weight approach of the S&P 500 and several other familiar benchmarks. The surging purple isJ.P. Morgan’s estimate of the group’s assets in the U.S. market.

The figure making the rounds this morning in the 2014 J.P. Morgan Global ETF Handbook is that “smart beta” ETFs around the world now manage $382 billion in investor money, or more than twice one recent look at the U.S. market (which makes up the majority of the tally).


Could investors really have doubled the size of this group in half a year? As it turns out, no. The goalposts are moving.

There’s plenty of love for “smart beta,” but the J.P. Morgan study redefines the group from its core of fundamentally weighted ETFs to encompass strategies based on carry, value, momentum, growth and volatility (which apparently also includes ETFs for small-sized stocks).

It makes a degree of sense: Every non-market-weight ETF gives you an implicit bet on something other than the standard market index. So why not have categories to reflect it? As the JPM group explains:

A pure risk factor is a long-short strategy that has exposure to a specific non-traditional risk and delivers return (premium) for that risk. Pure risk factors are in most cases constructed as market-neutral strategies. Examples include a portfolio that is long stocks with low valuation and short stocks with high valuations, in such a way that the exposure is market neutral (also called ‘Equity Value Factor’), or a portfolio that is long high-yielding currencies and short low-yielding currencies (also called ‘FX Carry Factor’).

There are several ETFs that give exposure to pure risk factors such as short volatility ETFs or FX carry ETFs. However, the majority of ‘Smart Beta’ ETFs give exposure to a combination of long market exposure and a certain factor (i.e. they give enhanced beta exposure rather than a market-neutral factor). For instance, many of the well known equity ETFs such as Small Cap Value, or Large Cap Growth ETFs fall under the definition of ‘Smart Beta Exposure’.

In addition to category leaders like PowerShares S&P 500 Low Volatility Portfolio (SPLV) and PowerShares FTSE RAFI U.S. 1000 (PRF), then, you’re also lumping in popular oldies such as iShares Russell 1000 Value ETF (IWD) and Vanguard Dividend Appreciation(VIG).

If the definition even now includes volatility-based trading products, then you’re also including exchange-traded notes such as Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX).

Even granting the logic, it’s still notable to watch Wall Street move the goalposts. The farther the definition expands, I’ll guess, the likelier the concept of “smart beta,” for all its faults, sticks around.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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