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Melissa Brown on Smart Beta ETFs (Audio) · Bloomberg Intelligence

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  Speaker 1: you're taking stock with Pim Box at Kathleen Hayes on
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  Speaker 1: Bloomberg Radio. This is taking stock. I'm Pim Fox. Well,
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  Speaker 1: what about exchange traded funds that say that they can
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  Speaker 1: outsmart the market? Well, that might be called smart beta.
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  Speaker 1: What is it? Does it really work? Let's find out
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  Speaker 1: more from Melissa Brown, Senior director of Applied Research at
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  Speaker 1: Axioma Axioma's Buyer Beware Research. Tell us more about this,
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  Speaker 1: Melissa Brown, Hi, Yes, Well, the buyer beware really refers
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  Speaker 1: to um the fact that many funds, many of these
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  Speaker 1: so called smart beta E t F that have very
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  Speaker 1: similar names, let's say they all have high dividend yield
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  Speaker 1: in the name, actually look extremely different from each other.
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  Speaker 1: And alternately, when many have very similar names are very
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  Speaker 1: different names, they actually look quite similar to each other.
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  Speaker 1: So you really need to dig a little deeper into
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  Speaker 1: what's driving the returns in the fund to really understand
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  Speaker 1: if you're getting something that's the same or different. Certainly,
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  Speaker 1: certainly sounds to sounds like it makes a perfect sense.
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  Speaker 1: But what if you could describe what is beta and
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  Speaker 1: what is smart beta when it comes to exchange traded funds. Ah. Yes,
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  Speaker 1: so beta refers to having some exposure to some source
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  Speaker 1: of systematic return. In other words, if you think that
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  Speaker 1: stocks that are cheaper are going to outperform stocks that
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  Speaker 1: are more expensive, in other words, value stocks should do well,
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  Speaker 1: then um a stocks how it stock looks in terms
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  Speaker 1: of its value score or its exposure or um That
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  Speaker 1: is what it's beta is, its sensitivity to the movement
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  Speaker 1: in that factor. Smart data is a term, and there's
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  Speaker 1: many other terms systematic beta and many other ways of
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  Speaker 1: describing this, but smart data is um a way of
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  Speaker 1: getting that kind of exposure, getting that kind of systematic
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  Speaker 1: return um to and using factors that are expected to
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  Speaker 1: outperform the market, whether it's value or momentum or high
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  Speaker 1: dived in yield or low volatility or you know. I
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  Speaker 1: could go on and on. There are many different categories,
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  Speaker 1: but those all kind of generally fall into this idea
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  Speaker 1: of smart data. Would it also would would another not
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  Speaker 1: another but an additional definition of this? Would it be
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  Speaker 1: invest an investment strategy that puts the emphasis on the
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  Speaker 1: use of alternative index construction rules rather than more traditional
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  Speaker 1: UH market based industries like market capitalization or or market price.
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  Speaker 1: I mean doesn't that kind of it emphasizes capturing these
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  Speaker 1: factors or inefficiencies and then turning them into rules in
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  Speaker 1: ways that people can understand exactly. So they may a
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  Speaker 1: manager may take let's say the hundred most attractive stocks
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  Speaker 1: and equally wait them, or they may wait them by
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  Speaker 1: their exposure. So the highest dividend yielding stock, it's the
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  Speaker 1: highest weight in the portfolio. So there's there are a
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  Speaker 1: number of different ways, um that you can wait them
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  Speaker 1: that are you're, as you said, it's absolutely right, going
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  Speaker 1: to move them away from the index, or they're gonna
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  Speaker 1: look very different, even if they have the same names.
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  Speaker 1: That waiting scheme in and of itself is going to
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  Speaker 1: make them look very different. Why are they attractive now, Well,
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  Speaker 1: they are. First of all, many of these types of
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  Speaker 1: portfolios have actually outperformed broader major market indices. So that's
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  Speaker 1: that's one reason. So they have that the performance wind
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  Speaker 1: at their backs. Another reason is that, um, I think
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  Speaker 1: personally that you put smart in the name of something
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  Speaker 1: and it at least attracts people's attention whether um, you know,
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  Speaker 1: whether in fact it's smart or not right full full
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  Speaker 1: marks for marketing. Yes, exactly, exactly, And in fact, what
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  Speaker 1: a lot of these funds do are no different from
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  Speaker 1: what a lot of quantitatively driven or systematic managers have
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  Speaker 1: done for years and years and years. Uh. They've just
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  Speaker 1: kind of relabeled it and repackaged it into an e
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  Speaker 1: t F format, which does make it easier to buy
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  Speaker 1: and sell, makes it easier to buy and sell, and
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  Speaker 1: would ostensibly make these products less expensive when compared to
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  Speaker 1: those managers you just described. Or is that inaccurate? Yes? No, No,
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  Speaker 1: Usually e t F T smart data e t F
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  Speaker 1: are less expensive. They because they're so rules based. You know,
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  Speaker 1: the rules are set up and they can just run.
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  Speaker 1: You don't really need a manager sifting through the stocks
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  Speaker 1: that you might be buying and selling, for example. So
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  Speaker 1: they certainly can be cheaper and um and to some
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  Speaker 1: extent deliver a similar return, except for that you don't
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  Speaker 1: have that manager sifting through the stocks that are being
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  Speaker 1: bought and sold to see if maybe you don't necessarily
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  Speaker 1: want to buy this one or that one, Melissa, without
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  Speaker 1: without pushing you to indoors or or or in any way.
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  Speaker 1: Comment upond performance. Could you just give us an example
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  Speaker 1: of one of these smart beta ETFs and how they work?
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  Speaker 1: Um Yeah, so one of the ones that we've done
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  Speaker 1: a recent study on our high dividend yield and we've
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  Speaker 1: we looked at a number of different flavors of high
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  Speaker 1: dividend yield um some are what's really interesting is their differences.
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  Speaker 1: So some are very heavily weighted in the energy sector,
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  Speaker 1: for example. Some may be much more heavily weighted in utilities.
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  Speaker 1: Some are much more evenly distributed across different kinds of sectors.
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  Speaker 1: Um So. But the thing they have in common is
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  Speaker 1: they all have high dividend yields, but they get to
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  Speaker 1: that dividend yield in a different way. So that would
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  Speaker 1: be kind of one example of the type of fund
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  Speaker 1: that might be put under the label of smart beta.
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  Speaker 1: Thank you very much, Melissa Brown, Senior Director of Applied
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  Speaker 1: Research at Axioma telling us about their buyer beware research
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  Speaker 1: when it comes to smart beta et f s. Thank
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