Scientific Beta

Professional Wealth Management: "Vanguard’s Jeff Molitor makes the case for cap-weighted indices while Felix Goltz of EDHEC-Risk Institute backs smart beta strategies."

Professional Wealth Management 28/08/2013

"(...) Vanguard’s Jeff Molitor makes the case for cap-weighted indices while Felix Goltz of EDHEC-Risk Institute backs smart beta strategies. (...) Smart beta, advanced beta, alternative beta or strategy indices are terms coined to describe equity index strategies that generate superior risk-adjusted returns compared to standard market cap-weighted indices. Market cap-weighted indices have shortcomings due to high levels of concentration in large-cap growth stocks that lead to poor risk-adjusted returns. Smart beta strategies that are able to deliver superior risk-adjusted returns have therefore made inroads into the traditional passive investment sector that uses cap-weighted indices. (...) The second generation of smart beta strategies will allow investors to better control the risks to which they are exposed by clearly distinguishing between the risks associated with stock selection and weighting schemes. This second generation will also allow investors to control the level of risk relative to standard market cap-weighted indices. The growth of smart beta is expected to increase as investors become more familiar with the first generation of strategies. Since smart beta strategies follow mechanical trading rules and can be easily replicated, asset managers are increasingly offering ETFs that use an underlying smart beta strategy. They benefit from offering these products to a broader investor base and the potential of new uses of smart beta strategies such as in tactical asset allocation or combining strategies to make performance less reliant on market conditions. (...)"