Smart Beta: How do I get started?

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

All smart beta strategies are not created equal. Find out how to navigate the universe to help identify a strategy that seeks to meet your objectives.

Given the growth of assets in smart beta strategies, it is no surprise that the number of funds available has multiplied.1

However, amid an increasingly crowded landscape it can be challenging to determine which strategies can best deliver their investment objective. We believe the due diligence process does not have to be arduous and can be structured around three key dimensions: purpose, exposure and provider.

1. Source: BlackRock, SimFund ETP as at 30th April 2017 

Purpose | Exposure | Provider


1) Purpose

To decide which smart beta strategies to use, investors need to be clear about what they are aiming to achieve when using them. Key areas of considerations may include their investment outcome or whether the user is planning to use the allocation for a tactical or strategic purpose.

2) Exposure

Factors are at the heart of smart beta strategies. As a result, investors need to understand the types of factors a smart beta strategy may be targeting, as well as the methodology being used to pursue these.

  • Evidence: Is the chosen investment strategy supported by robust academic research that evidences the factor as a historically persistent driver of returns?
  • Metrics: Does the chosen investment methodology define factors in a way that suits the strategy’s objective? For example, a methodology may use metrics which strengthen or weaken the ability to deliver its objective consistently over time.
  • Risks: Does the index methodology introduce unintended risks, such as persistent over/underweights to certain sectors that might detract from performance?
  • Rebalancing: Does the rebalancing frequency both seek to maintain the expected factor exposure while containing transactions costs?

3) Provider

The provider should be an investment partner to its investors, offering performance and risk evaluations before and after product implementation. Investors should consider the track record of the product provider, their risk management and analytics capabilities as well as their ability to partner with the end client. Regular risk, performance and factor evaluations help to ensure that the smart beta product is delivering the intended investment outcomes.