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A Warning About Smart Beta ETFs

Last update on: Mar 14 2020
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Maneesh Shanbhag used to work at Bridgewater Associates and now runs his own hedge fund. He’s a quantitative investor, which means he spends a lot of time looking the data in detail. Shanbhag says the benefits of most “smart beta” ETFs are oversold. He believes the factors used to sort stocks (size, momentum, value, and a few others) are valid ways to distinguish stocks. But he says the real benefit of the factors is in identifying losers, or stocks to short. Most smart beta ETFs use the factors to identify stocks to buy and not to buy.

For example, if you sorted U.S. stocks by volatility over the past half-century, the most volatile group has the worst annualized returns, data analyzed by Greenline found. But after that, the benefits of the low-volatility factor level off, and the other groups’ returns are virtually indistinguishable from each other. In fact, the group with the lowest volatility posted annualized returns of 13 percent, compared with 16 percent for the middle group.

 

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