How smart is smart beta? To help answer that question, it might be useful to hear directly from investors who are actually using these strategies. To that end, FTSE Russell, a leading global index provider, conducted a survey of institutional asset owners in early 2015 to gather data on their usage of and satisfaction with smart beta strategies.1
The recently published results of that survey are telling. Institutional investors who are using smart beta strategies report high levels of satisfaction and that they plan to increase their allocations over time. Approximately 61% of those using smart beta reported that they are either "Satisfied" or "Very Satisfied" with these strategies and their "ability to deliver on intended investment outcome." And 61% of those using smart beta strategies also said that they plan to increase their allocations. The remaining 39% indicated that they planned to maintain their current allocation, and 0% said that they planned to reduce it.
To be fair, not all institutional asset owners are using smart beta strategies. Among those with at least $10 billion in AUM, approximately 27% of U.S. respondents and 68% of European respondents are currently using smart beta. But among those who have evaluated smart beta and haven't yet invested, nearly all of them (92%) said that they "will continue to monitor and evaluate" smart beta strategies again in the future.
Not all smart beta strategies are created equally
While smart beta is seeing growing usage, it's important to understand that not all smart beta strategies are created equally. Smart beta is a broad and growing category of index-based strategies that generally take a different approach in their construction than traditional indexes such as the S&P 500® Index. But that includes many different strategies, some of which might have investment merit and many of which likely do not.
Within that broader category, fundamental indexing is widely recognized as a pioneer in smart beta and is among the most widely adopted smart beta strategies. Since its introduction approximately a decade ago, fundamental indexing has shown a history of delivering enhanced diversification and risk-adjusted return potential over time.2 These qualities have led sophisticated investors to embrace the strategy. According to the FTSE Russell survey, among asset owners using a single smart beta strategy, fundamental indexing is by far the leader, with 57% using the strategy.
Using both market cap and fundamentally weighted ETFs is smart investing
Schwab Intelligent Portfolios includes allocations to both fundamentally weighted ETFs along with traditional market cap-weighted ETFs because these two types of index strategies can work together in your portfolio, adding diversification and return potential while also keeping overall costs low. The Charles Schwab Corporation has a long history of making investments more accessible and lowering costs for investors. With Schwab Intelligent Portfolios, investors now have efficient access through an automated investment advisory service to broadly diversified portfolios that include innovative strategies such as fundamental indexing.
David Koenig, CFA, FRM is Chief Investment Strategist for Schwab Wealth Investment Advisory, Inc.
1. "Smart beta: 2015 global survey findings from asset owners," FTSE Russell, May 2015.
2. West, John, "Flying High: RAFI at 10 Years," Research Affiliates, March 2015.