If there is one constant when it comes to investing, it’s that Wall Street loves a good marketing gimmick. After all, it makes it easier for them to sell you funds or investment advice. Remember the BRICs? But, every once in awhile, Wall Street does come up with an idea that, in spite of the spin, is actually a good idea.
In this case, we’re talking about smart beta.
While the term is mostly hated by a lot of people, the idea behind smart beta is very sound. And the fund type is even better. The fee war has finally trickled down to smart-beta ETFs. For investors, this frees up their market-beating potential and can now have them competing fair and square.
The Smarts Behind Smart Beta
While the name may be new, smart beta has been around for a long time. We’ve all heard of “value” or “growth” indexes/funds. And that’s kind of the gist behind the smart-beta movement. Smart beta takes its basic concept from using various fundamentals to build an index. This can be a simple quick dividend search or a more complex affair that screens for metrics like P/Es, price-to-book ratios, earnings profiles or debt levels. The kicker is that the screens and rules dictate what stocks are included in the index. Other than setting the criteria, fund managers aren’t doing the stock selection.