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What is smart beta?

Smart beta strategies typically capture factor exposures using systematic, rules-based approaches, such as an index. ETFs, popular vehicles for rules-based strategies, are cost effective ways to access smart beta strategies.

As ETFs, smart beta strategies can be efficient and low cost ways to complement or replace active funds and broad market index funds when seeking to enhance a portfolio’s returns and diversification or to reduce risk.

Learn more about factors and smart beta Learn more about factors and smart beta

 


What are the benefits of
smart beta investing?

  • Performance: Smart beta strategies seek to outperform traditionally weighted index funds, or enhance a portfolio in other ways, such as reducing vulnerability to stock market volatility. These strategies may also provide outperformance relative to traditional active mutual funds.

  • Outcome-Oriented: Smart beta can help improve your ability to align results with your preferences around risk aversion, cost reduction, etc.

  • Diversification: Smart beta's variety of alternative index exposure can help you diversify your portfolio.

What are the common questions associated with smart beta?

Question #1: Do smart beta strategies only consider equities?

Answer: Smart beta strategies may be based on equity factors such as volatility, momentum, earnings or dividends, but factors also exist across asset classes. BlackRock offers several fixed income smart beta ETFs.

Question #2: Are smart beta funds actively managed?

Answer: Smart beta funds are typically not actively managed. Their alternatively weighted construct, however, may provide for more frequent fund analysis and rebalancing than traditional index funds, giving them the potential to outperform a market index. Smart beta funds are often considered a hybrid of passive and actively managed strategies.

What are important considerations to smart beta investing?

  • Single vs. Multi-Factor. Investors can invest in smart beta funds managed with single or multiple weighting factors. A multi-factor smart beta fund may offer less risk from volatility.

  • Fit. Smart beta funds generally fall into four types of strategies. Choose the one that best aligns with your preferences:

    1. Factor-based strategies in which stocks are weighed or in which factors are separated into tiers

    2. Equally weighted strategies that take all factors into account

    3. Fundamentally weighted strategies wherein companies are selected and weighted by select fundamental factors

    4. Low volatility weighted strategies based on historic volatility

Smart beta use cases

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Challenge

An investor using an active mutual fund for large-cap growth exposure was frustrated with the high cost and disappointing performance of the fund over the past several years.

Considerations

MTUM vs. Large Cap Growth Active Funds

Increased return potential and reduced potential risk of MTUM vs. Large Cap Growth Active Funds. Using iShares Edge MSCI USA Momentum Factor ETF (MTUM), the investor could seek growth at a low cost.

Source: Morningstar, 3yr performance for period ending 9/30/17.

Risk is represented by standard deviation and measures how dispersed returns are around the average. A higher standard deviation indicates that returns are spread out over a larger range of values and thus, more volatile. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please click here.

Performance data as of previous day’s close. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Standardized performance and performance data current to the most recent month end may be obtained by clicking the fund name above.




Challenge

An investor had an equity portfolio consisting of three active funds that have historically produced excess returns to its benchmark over the long term. However, performance peaks and troughs were too dramatic for the investor’s risk tolerance.

Considerations

  • Minimum volatility strategies are designed to reduce volatility within a portfolio which can help create more consistent return potential in the long run.
  • iShares Edge MSCI Min Vol USA ETF (USMV) can be considered for use alongside a portfolio's active funds.

Rolling one-year excess returns

Adding a minimum volatility strategy had the potential to reduce steep drawdowns.

Source: Morningstar. Based on rolling 1 year excess returns through 9/30/17

Past performance does not guarantee future results. For standard fund performance, please click here.

Performance data as of previous day’s close. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Standardized performance and performance data current to the most recent month end may be obtained by clicking the fund name above.




Challenge

An investor had a portfolio of six U.S and international active equity funds. The investor was concerned that the overall portfolio expenses would erode excess returns. Three expensive funds were identified as candidates for replacement.

Considerations

  • iShares multifactor ETFs offer the potential to outperform broad market indexes but with similar risk and at low fees.
  • iShares multifactor ETFs offer similar diversified sector and country exposures as broad market indexes, which can help maintain a portfolio's risk profile.

Hypothetical Portfolio 1

Hypothetical Portfolio 2

Reduce Portfolio Costs

Performance data as of previous day’s close. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Standardized performance and performance data current to the most recent month end may be obtained by clicking the fund name above.




Challenge

Amid expectations for rising interest rates, an investor was looking to protect a portfolio of fixed income investments. The investor was also concerned about the lower levels of income they are receiving in the current low-yield environment.

Considerations

FIBR to help manage interest rate risk

The iShares Edge U.S. Fixed Income Balanced Risk ETF (FIBR) was allocated as a complement to the portfolio’s active bond funds to help manage interest rate risk while potentially enhancing income.

Performance data as of previous day’s close. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Standardized performance and performance data current to the most recent month end may be obtained by clicking the fund name above.




Why iShares for smart beta?

Trusted leader
BlackRock is a leader in factor investing, launching the first factor fund in 1971 and driving innovation for 40 years.
Sustained record of performance
iShares consistently delivers quality funds that clients globally rely on to invest for the future*.
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