Smart Beta ETFs, also known as strategic beta or factor-based ETFs, represent a hybrid between traditional passive and active investment strategies. Unlike traditional ETFs that track market indices based on market capitalization, Smart Beta ETFs follow rules-based strategies designed to outperform traditional benchmarks or achieve specific investment objectives.
Smart Beta’s Value proposition
The term ‘Smart Beta’ suggests that rather than simply providing investors with the return of the market, i.e. beta, these funds are designed to generate higher returns than passively managed ETFs. By under- or overweighting particular types of stocks, Smart Beta ETFs provide investors with distinct market exposures, i.e. investment factors, that can provide elevated returns beyond the average returns garnered by the sector or asset class.
Differentiating Smart Beta ETFs
Smart beta ETFs can be broken down into three subcategories: risk-oriented, return-oriented, and other. While there are numerous types of smart beta ETFs, here are some common ones:
Risk-oriented:
Low-volatility ETFs are comprised of stocks that are less volatile than their peers, which means that on a risk-adjusted basis, they should exhibit superior performance and provide exceptional returns relative to other portfolios. Low volatility investing allows investors to benefit from a proven strategy that provides them with innate risk mitigation and a selection of equities best suited to thrive during the ups and downs of an economic cycle.
For additional information on Low Volatility investing, a previously published article provides a fulsome overview of the investment strategy and ETFs worth considering. For investors interested in low volatility ETF solutions, BMO (TSX:BMO) has a suite of low volatility solutions worth considering:
- BMO Low Volatility Canadian Equity ETF (TSX:ZLB) | Ticker: ZLB
- BMO Low Volatility US Equity ETF (TSX:ZLU) | Ticker: ZLU
- BMO Low Volatility International Equity ETF (TSX:ZLI) | Ticker: ZLI
Return-oriented:
Momentum ETFs focus on capturing the market trend by investing in assets that have exhibited strong recent performance. These funds dynamically allocate capital to securities with upward price momentum, aiming to ride the wave of existing trends and potentially generate higher returns based on the continuation of those trends.
For additional information on momentum investing, a previously published article provides a fulsome overview of the investment strategy and ETFs worth considering. For investors interested in momentum investing, below are some momentum factor solutions worth considering:
- Morningstar Canada Momentum Index ETF (TSX:WXM)| Ticker: WXM
- CI First Asset Morningstar International Momentum Index ETF (TSX:ZXM)| Ticker: ZXM
- iShares MSCI USA Momentum Factor Index ETF (TSX:XMTM) | Ticker: XMTM
Quality ETFs invest in high-quality stocks, prioritizing companies with strong fundamentals such as stable earnings, low debt, and consistent profitability. These funds seek to provide investors with exposure to businesses demonstrating financial resilience and reliability, aiming for long-term stability and reduced volatility in their investment portfolios.
For investors interested in quality investing, below are some quality factor solutions worth considering:
- The iShares MSCI USA Quality Factor Index ETF (TSX:XQLT) | Ticker: XQLT
- Fidelity U.S. High Quality Index ETF (TSX:FCUQ)| Ticker: FCUQ
- BMO MSCI All Country World High Quality Index ETF (TSX:ZGQ) | Ticker: ZGQ
Fundamental ETFs invest in companies that exhibit strong fundamental factors such as earnings, dividends, and book value. These funds aim to provide investors with exposure to stocks exhibiting strong financial metrics, emphasizing the intrinsic value of companies. Fundamental ETFs offer a more comprehensive analysis beyond market capitalization, enhancing portfolio diversification.
For investors interested in fundamental investing, below are some solutions worth considering:
- iShares Canadian Fundamental Index ETF | Ticker (NLB:CRQ): CRQ
- Invesco FTSE RAFI Canadian Index ETF (TSX:PXC) | Ticker: PXC
Other:
Equal-weighted ETFs distribute investments evenly across all components, regardless of market capitalization. Unlike traditional market-cap-weighted funds, they prevent concentration in larger stocks, promoting a more balanced portfolio. This approach reduces the influence of a few dominant companies, offering investors broader exposure to the underlying index.
For investors interested in equal-weighted ETFs, below are some solutions worth considering:
- iShares Equal Weight Banc & Lifeco ETF (TSX:CEW)| Ticker: CEW
- Invesco S&P 500 Equal Weight ETF (TSX:ESG) | Ticker: EQL
In conclusion, Smart Beta ETFs attempt to blend the low costs and discipline of passive management with the potential to outperform a market-cap-weighted index. However, not all smart beta strategies are created equal, and there will be performance differences based on market conditions. For investors that seek to utilize Smart Beta ETFs within their portfolio, understanding their use cases and suitability in helping to fulfil their overall investment objective is essential.
This content was originally published by our partners at the Canadian ETF Marketplace