CFA Lecture

Caveat emptor - let the smart beta buyer beware

Frankfurt am Main

Demand for passive investment strategies has exploded, and none has attracted more attention than smart beta. The last few years have seen a steady flow of hundreds of billions of dollars from active to passive strategies, not just driven by private clients, but also by an increasing number of asset owners.

The attraction is plain to see; passive investment via, for instance, ETFs is easily accessible, has lower fees than traditional active management, and in the case of smart beta products, has the potential to outperform a cap-weighted passive index. So it is hardly surprising that these products are being aggressively marketed.

But do ETF buyers, especially those seeking smart beta strategies, really know what they are getting?

In order to answer this question, Christoph Schon, CFA, CIPM, examines four 'high dividend yield' ETFs and not only finds that they are very different in their compositions, risk characteristics and returns, but that they also have significant exposures to other factors, like low beta and low volatility.