Smart beta ‘neither smart nor beta’: Vanguard

Smart beta ‘neither smart nor beta’: Vanguard

Product proliferation means there are now more than 6,000 ETFs worldwide, says Vanguard – but whether or not they are all necessary is up for debate.

Speaking at an event in Sydney yesterday, Vanguard Asia-Pacific head of investments Rodney Comegys said there is now $4 trillion invested in ETFs globally, a figure set to double by 2020. 

“The world probably does not need 6,000 different ETFs,” Mr Comegys said, adding, “There aren’t that many new inventions in finance. Most of what comes in finance is about marketing and something new.”

He pointed to factor-based investing, or ‘smart beta’, as one ETF product set that is particularly over-represented worldwide.

Smart beta products are built around an index that weights companies on factors other than market capitalisation, such as value.

However, Mr Comegys said as far as Vanguard is concerned, smart beta is “neither smart nor beta”.

“Smart would imply that it’s better, that it’s going to outperform. No, it’s going to perform differently. At times it will perform differently than the index, at times it will perform worse,” he said.

But Mr Comegys said some smart beta ETFs may make sense for wealth management firms that have a conviction about a particular sub-sector.

“If you’re a shop that believes in small cap value and that’s where you want your clients positioned, you may use ETFs to do so,” he said.

“Imagine if you’re a shop that really wants a value tilt and your choices are 200 basis point value manager or a low-cost factor ETF.

“ETFs and product proliferation can be good, but you’re going to have to go and do the homework. There’s a lot of noise to get through.”

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