Tag Archives: smart beta

Debunking myths about Smart Beta and ETFs

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By Jeff Weniger, CFA , WisdomTree Investments

Special to the Financial Independence Hub

This is part one of a four-part blog series addressing the attacks on smart beta and ETFs. Today we address the supposed academic consensus that the only recourse for investors frustrated with active management is to turn to market capitalization-weighted index funds.

“That’s the way it’s ‘always’ been done”

In much of our research we lay out our case that much of the impetus for trillions of dollars to continue tracking market capitalization-weighted indexes appears to be little more than “that’s the way it’s ‘always’ been done.”

In this blog series, we’ll address the most common lines of attack against smart beta and ETFs.

For clarity, our discussion of smart beta will refer to this excerpt from the Financial Times:

Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends.1

The truth is that the “active management versus passive market cap-weighted indexing” argument is a classic false dilemma. Continue Reading…

How Smart Beta Strategies fared as Interest Rates rose in 2016

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Rising Rate Case Study (July 8, 2016 to Dec 31, 2016) When U.S. 10- Year Treasury Note Interest Rate Went from 1.36% to 2.44%

By Christopher Gannatti, Associate Director of Research, WisdomTree Investments

Special to the Financial Independence Hub

One of the biggest stories in 2016 was rising interest rates, most specifically that the U.S. 10-Year Treasury Note went from 1.36% on July 8 to 2.44% on December 31.1 While it may be too early to know if the greater than 30-year bull market in bonds (in other words, a longer than three-decade secular trend of falling rates) is over, 2016 did offer an interesting case study of smart beta strategies, many of which had only been in live calculation during falling rate periods.
How Strategies won as Rates rose

In the recent rising rate periods in 2013 (May 2, 2013, to December 31, 2013, when the U.S. 10-Year yield went from 1.62% to 3.03%)2 and 2016, a few big themes became clear:

  • Small Caps: One aspect of small-cap companies is their ability to respond quickly to trends of improving growth, which is typically apparent during periods when the 10-Year yield is increasing. Additionally, they tend to have cyclical exposures regarding sectors instead of more defensive exposures. Also, if the U.S. dollar is strengthening (not unusual when the 10-Year yield is rising), these firms do not tend to have exports as their dominant source of revenue and therefore have less of a competitive headwind.
  • Earnings: Rising rates tend to place strategies with higher valuations at risk, because one impact of rising rates is to lower the current valuation multiple of equities. WisdomTree’s earnings strategies are designed to provide lower price-to-earnings (P/E) ratio exposures to the market segments upon which they focus. It’s also notable that they tend to naturally be under-weight in the more defensive sectors of the market (Utilities and Telecommunication Services are two big examples) that usually tended to do better during the falling rate periods that directly preceded the rising rate period.

How Strategies Lost as Rates Rose

• Low Volatility/Minimum Volatility: It’s important to realize that the word “volatility” relates to both upside and downside market movements, seeking to lower both of them. Continue Reading…

What Is the Income Factor in U.S. Equities?

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blog-see-more-dividendschris_gannatti_crop-bwBy Christopher Gannatti, Associate Director of Research, WisdomTree

Special to the Financial Independence Hub

The factor discussion is gaining popularity in the world of smart beta indexing. Size, value, momentum, minimum volatility, quality—these are all factors in the current discussion, and for the initiated they are becoming part of the common index lexicon.

But are investors really looking for these specific factors by name? We explore how these factors relate to real-world investment goals.

Translating Factors into Investment Goals

Some commonly referenced investment goals are:

• Keeping principal stable for unexpected expenses and emergencies

• Generating a certain average annual return to meet future goals in retirement

• Drawing income in order to meet planned expenses

We focus on income, as WisdomTree was the first to create a suite of U.S. equity Indexes weighted by cash dividends.

Defining the Income Factor

Continue Reading…

Dividends: The Foundation of the Smart Beta Movement

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blog-see-more-dividendschris_gannatti_crop-bwBy Christopher Gannatti, Associate Director of Research, WisdomTree

Special to the Financial Independence Hub

Smart beta exchange-traded funds (ETFs) are rapidly proliferating and capturing assets at a faster clip than the broader ETF industry. In 2015, 143 smart beta ETFs came to market, [Note 1] representing half of the year’s new ETF launches, or double the percentage of traditional beta products born last year.

Dividend strategies are one of the primary drivers of smart beta ETF growth. Smart beta ETFs had about $616 billion in assets under management at the end of 2015, [Note 2] and more than a quarter of that total was allocated to dividend-oriented funds.

Since the publication of the widely followed Fama-French research in 1993, outperformance of fundamentally weighted indexes has mostly been attributed to the market factor, the size factor (mid- and small caps outperforming larger stocks) and the value factor. [Note 3] Later, momentum factor was added as an accepted driver of fundamental weighting’s ability to top market cap-weighted strategies.

At WisdomTree, we believe weighting by dividends elevates fundamental indexing or smart beta. In 2006, 25 dividend ETFs [Note 4] came to market, 22 of which courtesy of WisdomTree. Our Dividend Stream® weighting methodology offers distinct advantages over weighting by market capitalization, dividend yield or focusing on the number of consecutive years that companies have increased payouts. Continue Reading…