Smart beta strategies are clearly here to stay and, based on what I’m hearing from RIAs all across the country many – if not most – are incorporating smart beta into their clients’ portfolios. At the same time, however, I’m also hearing that some advisors are facing challenges in implementing smart beta strategies.
I spoke recently with David Mazza, Head of ETF Investment Strategy here at OppenheimerFunds, about those challenges. In Dave’s view, the rapid proliferation of smart beta and factor strategies is a significant reason why advisors face challenges implementing them.
Many investment professionals clearly understand the benefits smart beta and factor strategies may offer, whether in trying to achieve a specific investment outcome with a particular factor or delivering cost efficiency to client portfolios. Yet, according to Dave, as smart beta continues to become more prominent in investment strategy conversations with clients, some advisors are taking a step back and trying to gain a greater understanding and appreciation of the different kinds of smart beta strategies available.
For example, traditional alternatively weighted smart beta strategies (revenue-weighted, earnings-weighted or dividend-weighted) are closer to true market cap-weighted passive strategies, while single-factor strategies (low-volatility, momentum, size, quality, yield, and value) are more precision-based tools. Add to that mix multi-factor strategies, which combine two or more of those factors and are closer to traditional active management.
According to Dave, given the multitude of smart beta and factor strategies available, advisors and their clients are taking the time to evaluate which ones make the most sense for their specific situations, investment objectives, and desired outcomes, and that can take time to work through.
When to Implement Smart Beta Strategies
Another question we often get from RIAs centers on when might it make the most sense to implement smart beta and factor strategies, but just as importantly, when might it not make sense.
Of course, there is no single answer that is right for every advisor and every client in every situation. During our conversation, Dave addresses the question from the perspective of an advisor who has embraced a passive market cap-weighted strategy as well as one who takes an active approach to managing client portfolios. He discusses a hypothetical situation for both and offers possible portfolio solutions that fit within the framework of each advisor’s preferred investment approach.
Dave also makes the important point that smart beta works well with both passive and active strategies. According to Dave, smart beta sits at the intersection of passive and active management. He explains how smart beta borrows principles from both active and passive management.
As I noted at the top, smart beta isn’t going anywhere, which is why it makes business sense for RIAs to increase their knowledge of these strategies, how to incorporate them into client portfolios, and how they may help achieve desired outcomes.
Learn more about OppenheimerFunds’ comprehensive suite of factor ETFs, including single- and multi-factor strategies, and be sure to visit the OppenheimerFunds factor dashboard, which is updated monthly and provides our latest thinking on factor investing based on economic and market indicators.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Alternative weighting approaches (i.e., using factor weighting as a measure), while designed to enhance potential returns, may not produce the desired results.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.