Smart Beta: A way to access factors

Understanding Smart Beta Strategies

While the notion of factors themselves is not new – factor driven investments have become more widely available to investors in the form of rules based, transparent Smart Beta strategies.


What is Smart Beta?

By Sara Shores

Sara Shores, Global Head of Smart Beta for BlackRock, covers the basics.

Smart Beta products are not created equally

With so many different strategies in the Smart Beta landscape, how can investors differentiate each and identify potential challenges to achieve their goals? Consider the following six steps:

1. Clarify the investment goal


If investors have a specific long term performance, risk or style-orientation objective, finding the exposure they are looking for will be more easily achieved.

2. Verify the merit and investability of the exposure


Investors must carefully evaluate the economic reasoning driving the factor return and determine whether the exposure is consistent with their investment beliefs.

3. Evaluate potential performance in different market regimes


Factors with economic logic typically reward investors in the long term in exchange for taking risks that can lead to periods of underperformance versus the broad market.

4. Understand the strategy’s construction rules


An in-depth understanding of the methodology enables investors to understand whether the strategy is designed using diversified metrics.

5. Consider in the context of your existing portfolio


Understanding your existing factor exposure will enable you to identify factors that complement your existing portfolio.

6. Compare the costs of a product with its competitors

Compare costs

The cost paid for the product is a key drag on ongoing investment returns.

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