Approximately 10 years have passed ever since the launch of smart beta exchange traded fund. And now we are about to begin with the second decade and so we must be well known and aware about 5 things and investor needs to know about smart beta.
- Origin - Many do not know this but smart beta as it is not as familiar concept like Equity index, it comes from Towers Waston a professional service, though this term was used by the institutional investors from the year 1970. And roughly after 25 years of mutual funds, smart beta index was launched in the year 2003.
- Measurement - Beta is basically going to measure an individual portfolio and security. Individual stocks are than ranked according to how much they diverge with the beta. A stock with a beta return has two options it might be positive or negative, though when the word smart comes into the picture it changes everything. Smart beta is nothing but an investment strategy designed to add value by rebalancing the companies that have been built into a particular index solely on the basis of their objective factors.
- Size - smart beta index is quite different from other type of indexes like equity index, it is applied to basically a chain of objectives as well as rule screens of every company's index component. Smart beta than ranks the companies on the basis of these specific factors, it even weighs them solely on these factors.
- Smart beta Etf's - smart beta ETFs are especially designed to locate and track all the newly developed alternatives of weighing indexes. Though the smart beta ETF's are passive yet they are able to leverage active qualities through systematic rebalancing.
- Fundamental analysis- Smart beta ETF's do not blindly weigh or rank any company's index they use fundamental analysis instead of weighing the companies on their size, using fundamental principles it accurately determines which companies would be given larger piece of index and will get the benefit of enhanced risk profile.
Smart beta analysis investment can lead to the expansion of the options available to the investor and then the investor has to evaluate depending on their investment and time horizons of how frequent they are in the stock market.
Every investor should consider a very smart investment and always go for smart beta EFT's, many of the investors just take it as a strategy as it helps them to expand their options and help to diversify their risk in different companies rather than fixating it on one, the investors should try and yet evaluate this smart beta strategies depending on their time horizons of how and when or how frequently they invest in the market or the objective behind their investment.
In depth evaluation is the key to success when it comes to stock market, though smart beta index is never wrong it yet gives a micro picture, as it is to an individual approach. Evaluate all the options given and invest in the ones that best suit you and will bloom your returns.
So these were the top 5 things everyone should know about smart beta index and how it works in the stock market, what the approach is and how one investor has to reconsider and accordingly take the decision of investment.
The Author has completed her graduation in management studies and is currently perusing CFA (Chattered financial analyst) and is a blogger. She holds a keen interest in every stock exchange term like smart beta index and equity index and holds an in depth knowledge about it and aspires to be a veteran in this field.