homepersonal finance NewsMF Corner: Understanding smart beta indexing strategy and its performance across market cycles
MF Corner: Understanding smart beta indexing strategy and its performance across market cycles
Investors should be aware of the cyclicality inherent in these products and the need for careful evaluation of market conditions to determine their effectiveness. As always, seeking professional advice and conducting thorough research is crucial when considering any investment strategy, including smart beta indexing.
Smart beta indexing strategy offers an alternative approach to traditional market-cap-weighted indexing. By incorporating factors beyond market capitalisation, such as size, quality, value, momentum, and low volatility, smart beta strategies aim to enhance risk-adjusted returns.
Siddharth Srivastava, Head- ETF products and fund manager at Mirae Asset Investment Managers, sheds light on the concept of smart beta indexing strategy and its efficacy in different market cycles. In a recent interview with CNBC-TV18, Srivastava provided valuable insights into this investment approach that has gained significant attention in the financial industry.
One important distinction to note is that smart beta indexes do not solely rely on free float market capitalisation to construct their portfolios. Instead, they incorporate additional factors that go beyond mere market size, aiming to capture potential inefficiencies and improve risk-adjusted returns.
"Smart Beta indexing is a strategy where stocks are selected as well as weighted in a portfolio based on factors such as size, quality, value, momentum, low volatility etc. Here, the selection is not based on free float market cap but selection is based on these individual and multiple factors," he said.
Another key characteristic of smart beta indexing is sector tilting. Unlike market-cap-weighted indexes, smart beta indexes are typically tilted towards specific sectors. This tilt can be based on factors such as sector momentum, valuation, or a combination of different factors that the strategy deems suitable for superior performance. By tilting towards certain sectors, smart beta strategies aim to exploit market opportunities and potentially enhance returns.
One aspect that investors should be aware of when considering smart beta products is their cyclicality. These investment vehicles often exhibit cyclicality in their performance. Just like any investment strategy, smart beta may experience periods of outperformance and underperformance, depending on the prevailing market conditions and the factors incorporated into the strategy.
For more details, watch the accompanying video
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