Author: Consultant, Michael Pappoe
In recent years, there has been a significant change in how investors manage their portfolios. Traditional methods of investing, such as index funds and actively managed funds, are no longer the only options available. Two newer approaches that have gained significant traction are smart beta and thematic Exchange-Traded Funds (ETFs). These innovative investment vehicles are changing the landscape of investing, offering investors more options for building diversified portfolios that can help achieve their financial goals.
Smart Beta ETF
Smart beta ETFs, also known as strategic beta ETFs, are a type of exchange-traded fund that uses a rule-based approach to select and weigh stocks. It does this based on a variety of factors such as value, momentum, and volatility to determine the weightings of each stock in the portfolio. Using these alternative weightings, smart beta ETFs aim to outperform the market or reduce risk while maintaining a similar level of diversification as traditional index ETFs
One of the advantages of smart beta is the ability to capture specific market trends or anomalies that may not be reflected in the broader market. For example, focus on high dividend-paying stocks may outperform the market during periods of low interest rates when investors are seeking income.
Below are some pros and cons of smart beta ETFs:
Smart Beta Example
An example of a Smart Beta ETF is the “iShares MSCI USA Size Factor ETF” Ticker: SIZE
This ETF gives the buyer exposure to large and mid-cap U.S stock with a tilt towards smaller and lower risk stocks in the universe. The factor of tilting towards companies with a relatively smaller average market capitalisation is known to have historically driven a significant part of companies’ risk and return.
Thematic ETF
Thematic ETFs, on the other hand, focus on investing in companies that are aligned with a specific theme or trend. They offer investors exposure to specific industries, such as renewable energy, artificial intelligence, e-sports, or cybersecurity. Thematic ETFs aim to capitalise on long-term trends and structural changes in the global economy, rather than simply tracking the performance of a specific market sector or index.
A benefit of thematic ETFs is that they can offer diversification within a particular industry or theme. For example, an investor wanting exposure to the renewable energy sector may choose a thematic ETF that invests in a range of companies involved in wind, solar, and hydropower rather than investing in just one company.
Thematic Example
An example thematic ETF is “L&G Artificial Intelligence ETF” Ticker: AIA
This ETF provides exposure to a basket of companies that have a distinct portion of their business and revenue from the field of Artificial Intelligence e.g. Microsoft, Alphabet, Autodesk etc.
Summary
Smart beta and thematic ETFs are changing the landscape of investing. They provide investors with more options for building diversified portfolios that align with their investment goals and values. Advisers may find themes easier to understand compared to factors, especially those with a thematic focus, as they often deliver performance similar to smart beta strategies.
These innovative investment vehicles offer the potential for improved returns or reduced risk compared to traditional index funds, while still maintaining a level of diversification.
Given the fungibility smart beta and thematic ETFs offer investors, it’s likely their popularity will continue to rise over the coming years.
We work closely with asset managers to help shape and refine their business strategy. If you’d like to discuss your business strategy and how ETFs would form a part of it, please get in touch.
We use necessary cookies to make our site work. We'd also like to set analytics cookies that help us make improvements by measuring how you use the site. These will be set only if you accept.
For more detailed information about the cookies we use, see our Cookies page.
Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.