Smart Beta, Smart Bet?

Smart beta funds have been increasing in popularity over the past 10 years.

Using mostly passive investment methods, smart beta funds apply a factor investing approach. These smart beta funds track an index but aim to beat the returns by using a variety of factors to shift the metrics used to select stocks.

Strategies range from equally weighted, fundamentally weighted, factor-based or low volatility. These portfolios offer transparent, low-cost investment strategies.

And multi-factor strategies, unlike single-factor methods, provide exposure to any combination of factors to track an index. The investor benefits through greater diversification, a broader foundation for returns and the potential for lower tracking errors.

The cherry on top is that the expense ratio is typically lower than an actively managed fund. One multi-factor smart beta fund worth examining is the SPDR Russell 1000 Low Volatility Focus ETF (NYSE: ONEV).

The SPDR Russell 1000 Low Volatility Focus ETF is a multi-factor smart beta exchange-traded fund (ETF) that provides broad exposure to large capitalization U.S. indices. The fund uses a multi-factor sampling strategy to maintain a portfolio of stable, low volatility stocks with a combination of growth and value equities and a small-size factor tilt. The portfolio aims to offer below average risk alongside an average return, seeking to reflect the performance of the Russell 1000 Low Volatility Focused Factor Index, the fund’s benchmark.

To create a basket of stocks, this fund, unlike other low volatility funds, scales the factor scores of the Russell 1000 index members based on these four out of five common factors: value, quality, small size and low volatility. These factors allow for a range of the Russell 1000 midcaps to be included in the weighting strategy that may not be considered using a single-factor approach.

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This alternative weighting diversifies the portfolio by focusing on different segments of the market. This keeps the portfolio more balanced than traditional market-cap weightings, with the goal of maximizing risk-adjusted returns. Top asset classes currently contributing to this fund are Industrials, Consumer Cyclical, Technology and Healthcare.

For long-term investors who want to explore multi-factor smart beta investing, the SPDR Russell 1000 Low Volatility Focus ETF provides low-cost entrée into the large capitalization area of the market and promises a high return. The fund is sponsored by State Street Global Advisors.

Top holdings in the portfolio include Cencora Inc (NYSE: COR), Cognizant Technology Solutions Corp Class A (NASDAQ: CTSH), Archer-Daniels Midland Co (NYSE: ADM), Centene Corp (NYSE: CNC) and McKesson Corp (NYSE: MCK).

Since its December 2015 inception, the fund has trended higher. ONEV is part of a trio of ETFs that aim to achieve high quality and value alongside low volatility.

The fund is down 2.68% over the past month, up 3.33% over the past three months and up 5.45% year to date. The fund has a net asset value of $547.28 million and a modest expense ratio of 0.2%.

While multi-factor smart beta portfolios may be appropriate for some investors, there is a wide range of available strategies. Investors should always do their due diligence before adding any stock, fund, or ETF to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.

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Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.