What’s the deal with smart beta?

A major announcement from two large financial institutions is forcing advisors to reconsider a product many dismiss as a fad.

What’s the deal with smart beta?

In the past week two large financial institutions introduced smart beta products suggesting advisors who’ve labelled them a fad might want to reconsider.

Lost in the shuffle of the pre-budget rhetoric were two smart-beta announcements, from PowerShares Canada and Desjardins Funds. While PowerShares brought three new ETFs to the marketplace, Desjardins was also busy bringing four new mutual funds to the wealth management party.

No matter the investment vehicle, the concept of smart-beta continues to gain traction on an increasingly busy playing field.

“Smart beta combines the best feature of active management (ability to outperform the market) with the best aspects of passive indexing (transparency and low costs),” says Aysha Mawani, vice president of corporate affairs at Invesco Canada. “By regularly rebalancing to target weights, smart beta portfolios automate the process of trimming winners and adding to underperformers – buying low and selling high.”

Over at Desjardins their thoughts on the subject aren’t much different.

“Strategic beta or smart beta management is based on a methodology designed to generate substantial additional value over a three- to five-year investment horizon," explained Nicolas Richard, vice president of Investment Strategies with Desjardins Global Asset Management.

Richard suggested that smart beta works best over a longer period of time. This argument appeals to some advisors.

“I’m a big fan actually… I use First Asset Canada Value and US Value – FXM and XXM.  I also use Purpose Investments – PDF (Dividend rules), PHE (Us Equity rules and short-hedge) and the PDA (Real Asset),” says Brent Vandermeer, an advisor with Hollis Wealth Inc. in Ottawa.

Vandermeer uses an active and tactical asset allocation strategy with investments typically seen as “passive” and “low cost” as the core and “active” strategies complementing those core investments. It’s a process intended to provide stable, consistent and positive risk-adjusted returns.
Vandermeer reiterated the benefits of combining strategies, which extend beyond any trend.

“I love how we’re using academic research to make passive investing better,” he said. “It helps bring together my value investor roots and way of thinking with the academic research pointing toward passive and index investing with low costs.”