The Traders Journal

Smart Beta Funds Leading to Stupid Choices


The latest wave on Wall Street’s beach of complexity and opaqueness is a new type of ETF fund referred to as a Smart Beta Fund.  I’ve even heard these new funds referred to as Bionic Beta Funds.  Consider this a case-in-point and follow-up to my blog last week where I ranted against Wall Street’s purposeful complexity.

It’s no longer a case of passive (index) funds versus active managed funds.  Now, they offer ETFs that are semi-active.  These funds operate in the overlapping area between passive rules-based ETF funds and actively managed discretionary portfolios.  According to Morningstar, there are now at least 342 such funds in the USA.

My concern is that these funds keep ratcheting up the sales pitch before they actually produce any noteworthy results.  None of them has existed through one full market cycle, yet not so smart investors are acting recklessly aggressive by throwing big money into these so-called “Smart” Beta funds.  

To go along with their unproven track records and bionic marketing claims, some of these funds reference proprietary indexes with little or no discernible edge being offered.   Many of these funds sponsors are adept at promising greater returns, but I’m not yet convinced that I’ll be adequately compensated for the greater risks.  

As individual investors, we are burdened with all this layering of complexity that, to be reasonable, demands increasingly rigorous due diligence on our part.  Frankly, I’m comfortable with a more wait-and-see attitude.  To their credit, Morningstar has relabeled Smart Beta Funds and now calls them Strategic Beta instead – which I appreciate since it does away with the rosy connotations inferred by the word ‘smart’ in Smart Beta.  They claim they will offer investors the “compass” to better run the Strategic Beta gauntlet and separate the sales pitch from the performance.  

Time will tell, so until then we individual investors should remain cautious. 

Trade well; trade with discipline!
-- Gatis Roze



Gatis Roze
About the author: , MBA, CMT, is a veteran full-time stock market investor who has traded his own account since 1989 unburdened by the distraction of clients. He holds an MBA from the Stanford Graduate School of Business, is a past president of the Technical Securities Analysts Association (TSAA), and is a Chartered Market Technician (CMT). After several successful entrepreneurial business ventures, Gatis retired in his early 40s to focus on investing in the financial markets. With consistent success as a stock market trader, he began teaching investments at the post-college level in 2000 and continues to do so today. Learn More
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