Smart beta and pros and cons

Smart beta is nothing but used to track the market index, this is different from the traditional index funds. The managers of this might use equal weight index services, the approach on which the weighted based upon a fundamental approach.

They analyze every aspect like the equity index as well and there are many arguments about the pros and cons of the smart beta index. They remove the emphasis on the stocks in the index with the largest market cap weightings as these stocks perform bad they have a very sizable impact on the performance of the index relative to the smallest components of the index.

Though the ETF’s of the smart beta index have quite higher expensive rations than the market capitalization weighted index products they are yet somewhat cheaper than most of the active managed funds.

Pros of the smart beta strategies-

• They have superior portfolio returns.
• The smart beta helps the investor to reduce the portfolio risks
• The dividend income increases considerably with the smart beta
• The smart beta gives a more efficient and has a very good exposure to the equity risk premium

And according to the smart beta strategies there are quite a few cons and risk factors for the investors as well and following are they-

• False Alpha
• Crowding or extra money that has been a money chasing strategy
• Tracking error, the smart beta is not good enough to track the weight of the indexes.
• Many a times the smart beta index ETF’s do not trade very well unlike the vanilla index products.

The smart beta has both its pros and cons, this is the best for at least the small investors and many of the financial advisors use this product directly using the ETF strategists.

Before investing a person must understand how these smart beta strategies must work and how and why does it provide extra value to the investors and even enhances their returns and even helps them to lower the risk of their investments in the funds.