What is strategic beta and why should you use it?

What is strategic beta and why should you use it?

What is strategic beta and why should you use it?

Can you have the best of both worlds with your ETF portfolio? Can you leverage both active and passive strategies? Well, that’s the aim of strategic beta – and they’re gaining more popularity among investors.

It is, therefore, no coincidence that more product companies are looking to enter the space to provide their own options to investors.

Mark Bankay, head of ETF and institutional product at Manulife Investment Management, told WP: “Strategic beta is a broad term which generally means index-based strategies that aim to deliver outcomes which are different in some way from a traditional index. Sometimes that means reducing volatility or generating higher yields, or in our case enhancing long-term return potential.” 

Manulife launched their ETF line-up in 2017. They now feature 11 funds, all of which utilize strategic beta strategies. On the active side, they offer the potential for outperformance by emphasizing specific segments of the market. On the passive side, they offer the benefits of passive index structure, low cost and transparency.

“Generally strategic beta strategies leverage empirical research which can be embedded within investment strategies,” said Darnel Miller, director ETF distribution and capital markets, Manulife Investment Management. “As an example, Manulife ETFs implement a strategic beta approach based on research showing that over time stocks of smaller companies, with lower relative prices and higher levels of profitability, have the potential to outperform over the long term.” 

While strategic beta strategies can be applied to a number of areas, one sticks out for Bankay. “Innovations in product design are happening across virtually all asset classes, but the increase in factor-based equity strategies has been very encouraging. In fact, strategic beta ETFs have seen a growth rate of approximately 30% in AUM over the past 10 years.” 

With that 30% increase, it appears that the strategies seem to be appealing to investors. Miller noted that not only has there been a growth in assets, but more product options available. “Investors are increasingly looking for ways to balance long-term results with the overall cost of their portfolios, and this investor preference will most likely continue.” 

For advisors, Bankay feels that strategic beta solutions can be the right answer when they are looking to construct a portfolio that balances costs with results. “In areas of a portfolio where investors and advisors are trying to balance costs with strong long-term results, multifactor or strategic beta strategies may be a good fit. For example, many investors hold the majority of their US equity exposure in well-known large cap companies, we’ve found increasingly they’re considering diversifying that exposure into the mid cap space, and a multifactor strategy is a great way to do that.” 

As more Canadian investors look to use ETFs, and become more comfortable with the design and strategy behind some of the newer funds, strategic beta is an area that Bankay and Miller see appealing to more investors as the industry moves forward.

“Mixing thoughtful investment solutions with lower costs is what drives the demand for funds in this space. Larger numbers of Canadians are using ETFs as they become more comfortable with newly designed funds and they seek to compliment investments in traditional funds,” added Bankay.