smart beta strategies
PHELPS FINANCIAL GROUP
smart beta strategies
Smart Beta seeks the best construction of an optimally diversified portfolio by defining a set of strategies to capture investment factors or market inefficiencies in a rules-based, transparent method. The increased popularity of Smart Beta is linked to a desire for portfolio risk management and diversification along factor dimensions, as well as seeking to enhance risk-adjusted returns above cap-weighted indices.
Smart Beta strategies seek to passively follow indices, while also taking into account alternative weighting schemes such as volatility, liquidity, quality, value, size, and momentum. Smart Beta is increasingly growing in popularity and being rapidly adopted by both asset managers and clients to become the next big thing in finance.
Barclays has partnered with Dr. Robert Shiller, a well-known Nobel Laurette, economist, and author, to jointly develop the Shiller Barclays CAPE® US Sector Index Family utilizing the Cyclically Adjusted Price Earnings (CAPE) ratio as a key driver for valuation of industry sectors within the US equity market. The Shiller Barclays CAPE® US Sector Risk Controlled 10% Gross TR USD Index within the family takes an equal-weighted long position in each of four favored sectors that are undervalued and possess relatively stronger price momentum. This is the net of cost version of the gross total return index denominated in USD.
The Index is designed to identify undervalued stocks and provide global diversification from the world’s three largest developed markets — America, the Eurozone, and Japan — using the CAPE ratio and the strongest momentum. Professor Robert Shiller designed this monthly process to find stocks that are well-established and relatively forgotten, with a long history of earnings but underpriced in the market. The Index evaluates and rebalances asset classes of stocks, bonds, and undervalued commodities on a monthly basis with the aim to respond to changing market conditions. Approximately 860 global stocks with 20 years or more of history are first evaluated by the CAPE ratio to identify potential values. Diversified stocks in each region with low CAPE ratios indicating good value are then evaluated for six-month momentum with 80 U.S. stocks, 40 Eurozone stocks, and 40 Japanese stocks with the strongest momentum being finally selected and equally weighted within each region. Shiller’s global stocks are always included in the allocation, with other asset classes included when they show positive momentum.
The S&P 500® Low Volatility Daily Risk Control 8% Index represents a portfolio of the S&P 500 Low Volatility Index plus an interest accruing cash component. The index is dynamically rebalanced to target an 8% level of volatility. Volatility is calculated as a function of historical returns.
The S&P 500 Dividend Aristocrats Daily Risk Control 5% Index measures the performance that S&P 500 companies have increased every year for the last twenty-five consecutive years. The index treats each constituent as a distinct investment opportunity without regard to its size by equally weighing each company. Overlying mathematical algorithms adjust the parent index risk profile to control a 5% volatility target.
The J.P. Morgan MOZAIC II Index attempts to provide a broadly diversified asset allocation while targeting a level volatility. The Index offers a notional exposure to a range of rolling constituents, each providing exposure to a benchmark asset class, including three U.S. equity index futures, three international equity index futures, three U.S. Treasury Note futures, three international government bond futures, and three commodity futures sector indices.
The BlackRock iBLD Claria Index is a diversified global multi-asset index that seeks to provide steady performance for a given level of risk. Daily volatility controls seek to mitigate downside risk. iShares ETFs, as the index constituents, allow for efficient access to major asset classes with a high level of transparency to the underlying constituents.
The Merrill Lynch RPM Index is a rules-based quantitative strategy that rebalances a portfolio containing equities, commodities and fixed income assets. The relative weights of the assets within the portfolio are determined based on a risk parity methodology and price trends. The Index adjusts its position in the portfolio daily to target a realized volatility of 5% annualized.
Designed by world-renowned Yale Professor Roger Ibbotson, the NYSE Zebra Edge Index is designed by Ibbotson and his team at Zebra Capital to leverage the opportunity of less popular stocks and provide an opportunity for consistent long-term returns through bull and bear markets. While the most popular and frequently traded stocks tend to provide below average returns, this index harnesses the concept that stocks that are less popular have a better opportunity for returns.
The NYSE Expanded Opportunities Index is a dynamic, multi-asset index designed by the Solutions & Multi-Asset Group at Morgan Stanley Investment Management. It is constructed to simulate many of the portfolio management processes used to manage over $67 billion in assets from a select group of clients including sovereign wealth, pension funds, and ultra-high net worth investors. The index allocates to 13 global asset classes in equities, fixed income, and commodities and other alternatives. Index holdings are generated daily using proprietary forecasting and optimization techniques.
The Barclays Trailblazer Sectors 5 Index aims to select a portfolio that has the highest expected return without exceeding a specified level of risk. In this regard, the index draws upon certain concepts from the “modern portfolio theory” approach to asset allocation, which holds that an optimal investment portfolio is one that maximizes expected return for any given level of risk. The eligible index components include exchange-traded funds that provide exposure to equity securities and exchange-traded funds that provide exposure to fixed-income assets. Equities are represented by ETFs that track the performance of companies in one particular sector or group of industries. Fixed-income is represented by ETFs that track the performance of U.S. treasury bonds with 20+ year maturities, mortgage-backed securities and high yield U.S. dollar-denominated corporate bonds. In certain circumstances, the index may also notionally invest in non-interest bearing cash.
Franklin US Index starts with a “smart screen” approach to stock selection. The smart screen starts with a list of 1000 well-recognized US stocks and looks for those that demonstrate financial Quality and Value — two factors experience shows are the most important contributors to stock performance. We also look at technical signals such as Momentum and Low Volatility that contribute to diversification. Only the top 250 stocks are then selected to act as the growth engine of the index.
The Janus SG Market Consensus II Index (the “Index”) seeks to capture the “wisdom of the crowd” to potentially outperform market benchmarks. The Index strategy is fully systematic and rules-based. The Index strategy features a performance engine designed by Janus Henderson based on analyst price targets and past dividends to select the stocks with the best growth potential among the largest US listed companies. Two control mechanisms developed by Societe Generale are then implemented with the intent to improve performance and stabilize the Index.
The objective of the Morningstar Dividend Yield Target Volatility 5 Morningstar Dividend Yield Focus Index by achieving a 5% volatility target. The target exposure is based on the ratio of the target volatility to the measured historic volatility. The target exposure is monitored daily, and is subject to both an exposure tolerance, and a maximum exposure of 1.
The Bloomberg US Dynamic Balance Index reflects the performance of an allocation strategy that is rules-based and shifts daily between the S&P 500 Index and the Bloomberg Capital Aggregate Bond Index, both well-established benchmark indices for the U.S. equities and U.S. bond markets. The Bloomberg US Dynamic Balance Index was created for those who are looking for a managed volatility option. In general, when the S&P 500 Index volatility is low, the balance shifts more toward the S&P 500 index, but when volatility is high, the balance shifts toward the Bloomberg Capital U.S. Aggregate Bond Index.
Incorporating an innovative rules-based asset allocation strategy, PIMCO Tactical Balanced Index is designed to provide dynamic exposure to stocks and bonds within a quantitative framework. It aims to provide a stable risk profile through constantly evolving equity and interest rate market environments. Unlike static multi-asset class indexes, PIMCO Tactical Balanced Index seeks to provide a stable risk profile by dynamically adjusting its exposure to stocks and bonds based on market volatility. The index is also designed to potentially benefit from bond market trends, such as rising interest rates.
The BNP Paribas Multi Asset Diversified 5 Index is a rules-based index sponsored by BNP Paribas comprised of eight components – three equity futures indices, three bond futures indices and two commodity indices (the “Hypothetical Portfolio”). BNPP MAD 5 Index seeks to measure the value of a hypothetical exposure to a range of asset classes and geographic regions based on momentum investing principles. On a daily basis, BNP MAD 5 Index determines weights of its components, using a rules-based methodology which seeks to identify weights for the components that would have resulted in the hypothetical portfolio with the highest return subject to a certain level of volatility.
This index consists of the Dow Jones US Real Estate Index and an interest-accruing cash component. Allocations to the cash component are dynamically rebalanced to maintain a target risk profile of 10%.
The WisdomTree Siegel Strategic Value Index leverages Professor Siegel’s methodology for evaluating company earnings relative to valuation and finding the most undervalued sectors in the U.S. market each quarter. The Index selects the four value sectors quarterly, and rebalances them to an equal weighting monthly. Each quarter, the 500 largest publicly traded U.S. companies are evaluated for operating earnings and value. The valuations are then used to identify the four most undervalued U.S. market sectors out of 10. The four value market sectors are equally weighted and rebalanced monthly to provide each an equal opportunity to contribute to returns. The Index includes a tactical market trend response that makes strategic allocations to provide more or less exposure to a Market Protection Strategy that is designed to insulate against market declines. The Market Protection Strategy uses an equal allocation of the Siegel Equity Index and a strategy designed to hedge market risk and provide returns when the broad market is declining. When multiple market trends are negative, the Index may allocate 100% to the Market Protection Strategy. A daily process is designed to achieve a 6% daily volatility by allocating between the tactical market trend response and an interest-free cash account. When markets are relatively stable, the Index may increase its equity allocation up to 150%.
In addition to Smart Beta strategies, popular household-name indices are also viable options.
The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Russell 2000 is by far the most common benchmark for mutual funds that identify themselves as “small-cap,” while the S&P 500 index is used primarily for large capitalization stocks. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares.
The NASDAQ 100 is a stock market index made up of 107 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. The stocks’ weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components.
The EURO STOXX 50 Index, Europe’s leading Blue-chip index for the Eurozone, provides a Blue-chip representation of super-sector leaders in the Eurozone. The index covers 50 stocks from 11 Eurozone countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The EURO STOXX 50 Index is licensed to financial institutions to serve as underlying for a wide range of investment products such as Exchange Traded Funds, Futures and Options, and structured products worldwide.
The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 50 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The EAFE acronym stands for Europe, Australasia, and Far East. The index is market-capitalization weighted and first ranks each stock in the investable universe from largest to smallest by market capitalization. The index includes a selection of stocks from 21 developed markets, but excludes those from the U.S. and Canada. The index is the oldest international stock index and probably the most common benchmark for foreign stock funds in the U.S.
This material is not a recommendation to buy, sell, hold, or roll-over any asset, adopt a financial strategy, or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person or entity. Clients should work with their financial professional(s) to discuss their specific situation. The financial products that utilize any of the indices above neither directly participate in the stock market nor directly invest in any index. Clients should undertake their own due diligence and seek appropriate professional advice before purchasing any financial product. Each index (including the concept, methodology, formulas, and/or algorithms thereof) is designed, complied, calculated, maintained, and/or sponsored by third-parties independent of Phelps Financial Group. By clicking any of the links above, you acknowledge that you are leaving the Phelps Financial Group website and going to a third-party website, which Phelps Financial Group neither owns, controls, nor can make any representation regarding its accuracy or completeness.