The Last Smart Beta Paper You’ll Ever (Have to) Read: Nuggets of Hope beneath the Hype

Abstract

The hype surrounding smart beta is drowning out valuable insights for improving investment outcomes. The core idea of smart beta—that factors independent of market direction are sources of sustainable and diversifying returns—is foremost among those insights. Unfortunately, the key selling points of most smart beta products—simplicity, transparency, and static implementation—actually make factor-based investing less effective. Smart beta also tends to be long only, equity focused, and single factor. The most promising forms of factor-based investing move beyond one or more of these constraints. In this article, the authors offer a “buyer’s guide” for linking factor-driven strategies to investors’ long-term objectives—one that may not mean “buying” any of the products on offer today.