Scientific Beta

Morningstar: "Perhaps the most interesting bit of news in the European exchange-traded products (ETP) industry in March was the EDHEC-Risk Institute's announcement that it would begin providing investors access to data on a range of so-called "smart-beta" indices for free."

Morningstar 02/04/2013

"(...) Perhaps the most interesting bit of news in the European exchange-traded products (ETP) industry in March was the EDHEC-Risk Institute's announcement that it would begin providing investors access to data on a range of so-called "smart-beta" indices for free. As part of EDHEC's initiative, they plan to unveil their indices and data on scientificbeta.com in the coming months. Of late, there has been increasing discussion in the European ETP industry focused on "smart-beta", but what exactly is "smart-beta"? Morningstar ETF analyst Al Kellet has written extensively on the subject, saying smart-beta indices are "somewhat of a middle ground {between active and passive management}… encompass{ing} a variety of transparent, rules-based approaches to constructing a portfolio, but with constituent weights decided by factors other than market capitalisation, which tends to hold sway in most purely passive exposures.” In essence, "smart-beta" indices, and by default "smart-beta" ETFs, are attempts to outperform a market-cap weighted index using pre-determined rules for security selection. Morningstar has covered some of these "smart-beta" strategies at length including equal weighted indexing, buy-write strategies, and monthly leveraged exposures. EDHEC, however, may be taking smart-beta to a whole new level. According to Kellet, "EDHEC is trying to refocus the smart beta discussion onto types of risk." Kellet argues that focusing on risk exposures rather than advanced index filtering may help encourage investors to manage portfolio risk more effectively. (...)"