Incorporating Smart Beta Strategies in Client Portfolios
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.

It’s not surprising in light of the rapid proliferation of smart beta and factor strategies. Many investment professionals understand the potential 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, 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.

Given the multitude of smart beta and factor strategies available, advisors and their clients are wisely 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

One question we often get from RIAs centers on when it might make the most sense to implement smart beta and factor strategies. Of course, no single answer is right for every advisor and every client in every situation. Much depends on the outcomes advisors, and their clients, are hoping to achieve.

One important consideration is whether a specific client has a preference for active or passive investment strategies. While the long-running debate over the merits of active versus passive continue, we believe smart beta disrupts the entire active versus passive discussion. We see smart beta sitting at the intersection of active and passive, and that is why, in our view, it works well with both approaches.

Smart beta strategies borrow principles from both passive and active management. From the passive side, smart beta embraces diversification, transparency, low cost, and rules-based investing. From the active side, it incorporates insights and techniques that investment managers have long used, but packages them in a more passive way.

For example, take an advisor who favors passive strategies due to their low cost and tax efficiency, and who has a client whose main concern is drawdowns. A low-volatility smart beta strategy, paired with a traditional large-cap passive approach, may potentially smooth the effects of peak-to-trough market declines, mitigate the impact of drawdowns on the portfolio, and help the advisor achieve outcomes that meet the client’s needs.

On the other hand, the challenge for an advisor who is more on the active side of the fence may be whether the portfolio is delivering the outcome the client is seeking at a reasonable cost per unit of return. In this instance, a multi-factor smart beta strategy might work well alongside a traditional active management approach. The right multi-factor strategy will not disrupt the outcome of the portfolio, while still delivering the potential for positive risk-adjusted returns, but at a lower cost.

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.