• BELL-BOTTOMS may be a thing of the
past. But they reemerged with a di;erent
name—boot-cut jeans. Very likely they’ll
be on their way out soon enough, only to
reappear in a slightly di;erent style with a
completely di;erent name. Just as fashion
trends come and go, so do market trends.
A new trend you may have heard about
is smart beta, i.e., strategies that select
securities based on familiar ideas like value,
growth, or volatility, as opposed to traditional index products that invest in proportion to company size. Investors and market
pundits may be quick to call smart beta the
hot new trend, but looking under the hood
of these strategies may prove a di;erent
conclusion. In fact, the idea of smart beta
or factor investing isn’t a trend. It’s been
around as long as other ideas active managers have sought to capture for decades, such
as value investing, but today the availability
of technology and data makes these investment ideas available at your fingertips.
What’s Old Is New Again
When you think of diversification, you
think about allocating your assets across
assets like equities, bonds, commodities, or
currencies. But what about understanding
the forces that may drive the risk and returns of performance within asset classes
and diversifying to those exposures?
As an example, within equities are factors such as value, growth, volatility, and
momentum that help to drive risk, returns,
and correlation—the so-called “building
blocks” of asset classes.
BlackRock is a leader in factor investing, which they o;er via smart beta exchange-traded funds (ETFs), among other
product structures. Factors may be selected based on their di;erent performance
depending on the market cycle’s phases.
When markets trend up, some factors may
move up, while others may move down.
“While the terminology of factor investing might seem new, the economic
concepts behind them are not. Innovation
in the asset management industry—made
possible by advances in data and technology—has provided investors with greater access to factors, including the development
of factor ETFs,” says Sara Shores, Global
Head of Smart Beta at BlackRock.
INDUSTRY SPOTLIGHT ; EASY
IN THE MONEY
Diversification’s New Look
BIG IDEA: SPREAD YOUR WEALTH BY ALLOCATING
IT IN DIFFERENT FACTORS.