Russell Indexes explains how investors can begin to understand the concept of 'smart beta'
By: Tom Goodwin, Russell Indexes
Defining ‘smart beta'
Today investors and their advisors understand that many sources of systematic return - generically called ‘beta' - can be sharply focused into an index form and used to shape the risk profile of an equity portfolio and provide for unique return patterns over a market cycle. The predominant term of description for this is ‘smart beta', a phrase everyone seems to dislike but uses anyway. As The Economist put it "Terrible name, interesting trend*". There is no shortage of suggested alternative labels, but none of them have caught on like ‘smart beta'.
A recent online poll** asked advisors and asset owners how they would define ‘smart beta', given four choices:
1. Non-cap-weighted
2. Fundamentals-based
3. Seeks to outperform a benchmark or reduce risks
4. All of the above
A majority answered ‘All of the above'. Clearly, a range of overlapping views is circulating. Russell Indexes offers its own simple definition of smart beta: Transparent, rules-based indices designed to provide exposure to specific factors, market segments or systematic strategies.
Where do investors begin?
Definition aside, investors continue to be faced with ‘noise' in the smart beta arena. This includes uncertainty around how smart beta is designed to capture intended exposures, and the differences between ‘strategy' and ‘factor' indices that have exploded onto the scene. So where do they begin?
Smart Beta Guidebook
We recently published the Smart Beta Guidebook: An overview of Russell Smart Beta Indexes with the aim to put Russell Indexes' smart beta offerings into appropriate context for investors. In Part One of the guide we summarise the investment rationale and performance of 12 of Russell's smart beta indices, paying particular attention to their factor exposures. Analysis on these 12 indices then follows. In Part Two, we explore some index combinations that might help investors and their advisors generate their own ideas for shaping the exact risk/return profile desired.
Download ‘Smart Beta' Guidebook
* The Rise of Smart Beta, The Economist, 6 July 2013.
** Max Chen (2014), ‘Institutional Investors, RIAs, Warm Up to Smart Beta'
Tom Goodwin, PhD
Senior research director, Indexes
PhD. in Economics, University of California, Davis
Tom Goodwin is senior research director for Russell Indexes with over 15 years' experience providing research and customer solutions for investment advising and asset management clients. In his current role, he focuses on helping clients utilise Russell's index tools to better understand capital market dynamics, more accurately measure market and portfolio performance, and gain efficient exposure to certain investment styles, market capitalisations or asset classes.
He conducts research on capital market trends as they relate to Russell Indexes, provides input into the firm's index product development process, publishes research reports and speaks to industry groups and the media on a regular basis.
He was most recently a principal and founder of Wealth Econometrics and served as the Chief Economist for King County, Washington. Prior to that, he spent 13 years at Russell Investments in a variety of roles including senior research analyst for the investment division, head of capital markets research in London and director of portfolio strategies.
