For the past few years, it is a rare occasion to open a financial publication without coming across the terms smart beta or exchange-traded funds.
Considering the power of data-sorting software, greater access to financial information, and more and more small businesses becoming major players in the global marketplace, it makes sense that alternatively weighted indexes would rise in popularity.
What exactly is smart beta, or exchange-traded funds, and are they a good idea for investors?
Introducing Smart Beta: The Basics
Traditionally, markets follow a strategy that favors companies with a larger market capitalization. Briefly, a company’s market capitalization is the overall worth of a company divided by the amount of shares in circulation. This makes them more influential in major indexes, like the S&P 500 Index or the Dow Jones Industrial Average.
Smart Beta directly offers a number of other factors to consider and try by giving a more accurate picture of how a stock might perform.
Smart beta provides alternatives to passive indexing, to provide lower-risk and better-performing stocks.
Smart Beta ETFs create different ways to organize the base index. The idea is to earn more return with less risk than traditional indexes by factoring different approaches to investment, to take advantage of inefficient markets.
Smart beta portfolio managers might use equally-weighted index approaches or based on specific criteria, such as earnings or book value, as opposed to the traditional cap-weighted allocation.
In the hands of the right financial planner, alternative indexes such as Smart Beta ETFs, could yield some pretty lucrative results.
If you are thinking of diversifying your portfolio, talking to a financial planner on the Sunshine Coast may help you take control of your wealth starting today.