The 'smart beta' frenzy has taken the ETF world by storm lately with almost all launches applying this strategy. Simply put, no one takes interest in plain vanilla ETFs or market-cap weighted ETFs anymore, as products with several winning attributes to fight every type of market dynamics are coming onstream.
As the name suggests, this approach calls for a strategic procedure rather than a market-cap oriented method of portfolio construction. Smart beta funds normally follow the passive investment strategy but with a slight twist which enables them to generate market-beating returns. Many people call this an enhanced investing strategy.
Inside the Growth Path of Smart Beta Strategy
Recently, BlackRock's iShares business, the world's largest issuer of ETFs, also estimated that smart beta ETFs will rope in as much as $1 trillion of assets worldwide by 2020 and $2.4 trillion by 2025. This reflects that an annual organic growth rate of 19% from the current market size of smart beta ETFs is $282 billion. Notably, this growth rate is twice the growth rate of the overall ETF market.
This huge success will be realized because investors dream of breezing past the market and locking hefty capital gains through this approach. Most of the fore-known issuers are diving into this theme or beefing up their portfolio with smart-beta products. Among this group, Goldman Sachs, Franklin Templeton, J.P. Morgan and BlackRock are at the front.
In short, the supremacy of mega-cap stocks are fading with a prolonged energy sector rout, adverse exchange rate translations, policy differentials across economies and extremely volatile market movement on global growth issues. As a result, issuers are leaving no stone unturned to ride out the market volatility and earn profits in every kind of market scenario.
Equal-weighted index beat the S&P 500 the most in three years, as per Bloomberg. In 2015, five out of the 10 industry groups witnessed their equal-weighted measure surpassed the traditional index, as per the source.
On the other hand, as per iShares, minimum volatility ETFs ruled the show in 2015 with over $11 billion inflows and have kept the momentum going even this year with a colossal $12.6 billion inflows.
Below we highlight a few ETFs that could be in focus in the days ahead for smart gains.
PowerShares S&P MidCap Low Volatility Portfolio ETF (NYSEARCA:XMLV)
The fund looks to track the S&P MidCap 400 Low Volatility Index and has added over 11% so far this year (as of June 6, 2016). This is in contrast to the 8.6% return provided by SPDR S&P MidCap 400 ETF Trust (NYSEARCA:MDY) following the traditional index.
Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP)
The fund follows the S&P 500Equal Weight Index and has added 6.2% so far this year (as of June 6, 2016) versus 3.7% offered by S&P 500 ETF Trust (NYSEARCA:SPY).
Global X Scientific Beta US ETF (NYSEARCA:SCIU)
The fund follows the Scientific Beta US Multi-Beta Multi-Strategy Equal Risk Contribution index and intends to beat out traditional market capitalization-weighted indexes with lesser volatility. SCIU has tacked on 4.7% gains in the year-to-date frame (as of June 6, 2016).
Global X Scientific Beta Japan ETF (NYSEARCA:SCIJ)
Investors should note that Japan investing has been choppy this year due to the strengthening yen. Nonetheless, SCIJ has fetched 3.4% returns so far against 2.2% losses incurred by the large cap Japan ETF iShares MSCI Japan ETF (NYSEARCA:EWJ).
WisdomTree Emerging Markets High Dividend Fund (NYSEARCA:DEM)
The fund measures the performance of the highest dividend yielding stocks selected on the basis of market capitalization and liquidity. The sheer focus on dividend has earned it about 10.9% return so far this year (as of June 6, 2016) compared to 6.4% return by the plain emerging market ETF iShares MSCI Emerging Markets ETF (NYSEARCA:EEM).