WHAT IS SMART BETA?

Smart beta strategies typically capture factor exposures using systematic, rules-based approaches, such as an index. ETFs, popular vehicles for rules-based strategies, are cost effective ways to access smart beta strategies.

As ETFs, smart beta strategies can be efficient and low cost ways to complement or replace active funds and broad market index funds when seeking to enhance a portfolio’s returns and diversification or to reduce risk.

LEARN MORE ABOUT FACTORS AND SMART BETA

What are the benefits of
smart beta investing?

• Performance: Smart beta strategies seek to outperform traditionally weighted index funds, or enhance a portfolio in other ways, such as reducing vulnerability to stock market volatility. These strategies may also provide outperformance relative to traditional active mutual funds.

• Outcome-Oriented: Smart beta can help improve your ability to align results with your preferences around risk aversion, cost reduction, etc.

• Diversification: Smart beta's variety of alternative index exposure can help you diversify your portfolio.

What are the common questions associated with smart beta?

Question #1: Do smart beta strategies only consider equities?

Answer: Smart beta strategies may be based on equity factors such as volatility, momentum, earnings or dividends, but factors also exist across asset classes. BlackRock offers several fixed income smart beta ETFs.

Question #2: Are smart beta funds actively managed?

Answer: Smart beta funds are typically not actively managed. Their alternatively weighted construct, however, may provide for more frequent fund analysis and rebalancing than traditional index funds, giving them the potential to outperform a market index. Smart beta funds are often considered a hybrid of passive and actively managed strategies.

What are important considerations to smart beta investing?

• Single vs. Multi-Factor. Investors can invest in smart beta funds managed with single or multiple weighting factors. A multi-factor smart beta fund may offer less risk from volatility.

• Fit. Smart beta funds generally fall into four types of strategies. Choose the one that best aligns with your preferences:

  1. Factor-based strategies in which stocks are weighed or in which factors are separated into tiers

  2. Equally weighted strategies that take all factors into account

  3. Fundamentally weighted strategies wherein companies are selected and weighted by select fundamental factors

  4. Low volatility weighted strategies based on historic volatility

Smart beta use cases

Challenge

An investor had a portfolio of six U.S and international active equity funds. The investor was concerned that the overall portfolio expenses would erode excess returns. Three expensive funds were identified as candidates for replacement.

Considerations

• iShares multifactor ETFs offer the potential to outperform broad market indexes but with similar risk and at low fees.
• iShares multifactor ETFs offer similar diversified sector and country exposures as broad market indexes, which can help maintain a portfolio's risk profile.

VIEW iSHARES SINGLE AND MULTIFACTOR ETFs

Challenge

Amid expectations for rising interest rates, an investor was looking to protect a portfolio of fixed income investments. The investor was also concerned about the lower levels of income they are receiving in the current low-yield environment.

Considerations

• iShares Edge U.S. Fixed Income Balanced Risk ETF (FIBR) seeks to provide balanced interest rate and credit risk.
• Investors seeking income and concerned about interest rate risk can consider FIBR for low cost bond exposure.

FIBR to help manage interest rate risk