You're listening to Taking Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. We are broadcasting from the b n Y Melan E t F Symposium in Data Point to California. I'm Pim Fox, my co host Kathleen Hayes. Joining us now is Karen Kerwin. He is a senior investment strategist for pro Shares. Karen, thanks very much for being here. Great to be here. Smart Beta. You've got to help me understand what exactly this is because I keep hearing how this is a big turning point for
a smart beta evaluation. How do you describe it to people? Yeah, and I heard you mentioned before it is a bit of an unfortunate term because it would imply, of course that if everything other than smart beta would be dumb. Of course that is exactly that is not the case. But uh, the genie is out of the bottom a little bit, so we are to some extent stuck with that term. You know, I think there's there's two ways to really think about smart beta um, and it's not
really all that complicated. It's been around for a long time. One of which is to just describe it as any type of investment strategy right that doesn't rely on a market capitalization waiting like the SP like the SMP five hundred, which takes its price divided by the SHARE's outstanding and you get a weight you know, in all these securities. UM. So a simple take on that would be UM the SMP five hundred equally, way to take all the SMP five names and instead of market cap waiting them, uh,
you equally wait them. That is by definition one form of smart beta UM. But really the other way to think about it is investment strategies that look to exploit a so called factor or thing, a dynamic, a characteristic in the marketplace that have explained returns over time. And I just want you to continue down this path because last a year ago here at in a point at the bing My melanconference, I moderate a smart beta panel. So to even understand it, I had to read a
lot of different things. And it's this whole point of looking returns and then also bringing in quantitative models. How does that part of it work? Sure, it's it's understanding what's driven returns over over time, So understanding things like size. You know, for example, stocks with a smaller size may have delivered performance over time, things like low volatility. Right, Stocks that have demonstrated low levels of volatility over time
have in fact explained much of stock market returns. So is it a case then where you take you're still going to have a certain maybe take part of the s and P find to do something, and you just add in a couple more of these themes or realities to juice up the return that you would have if
you do and have the smartness in there. Sure, So it's it's applying a specific factor to a group of stocks with the hopes of identifying or tilting your portfolio to get exposure to a particular factor that you may want uh to exploit in a particular period of time. Dividends,
for example, would be a good example. Everybody wants exposure in this type of market environment two companies that pay dividends, so dividends in a way are considered a factor, and dividends in this case would be the smart beta strategy correct is one example. There are many factors out there that academics that practitioners have defined and created investment strategies around. Um. The purest kind of definition of smart beta would rely
on probably more of a handful of factors, um. But again, in practice there are many many factors that are being employed over the last year. Then, since we were here, what what are one or two? What are a couple of the smart beta tactic strategies that have worked especially well? Sure, so I mentioned one of them already, which would be dividends, right,
Companies that pay dividends. For example, people looking to replace some of their income needs in their portfolio at a time when interest rates are very low, people are looking for the stocks that pay dividends as a way to compliment them in their portfolio. Another great example, um, would
be low volatility stocks. Right. And those are kind of different complimentary in some ways, um, And they're more probably risk focused in nature, meaning that people who are looking to perhaps protect gains in the stock market over the last couple of years are looking to identify stocks that have a low level of volatility in hopes that they will outperform. Now, just to understand a little bit more in depth, you can you who's the smart beta philosophy
internally inside the portfolio? Correct? I mean you can say, okay, here's my portfolio. Let's say you were I'm not suggesting you should be a hundred invested in long biotech. Then you could go and look for an E t F that would mitigate some of the volatility or risk, and as a result that would work as a smart beta, but within the portfolio, not necessarily worrying about the absolute performance outside correct. Yeah, you can employ smart beta strategies
in many different contexts in your portfolio. One way is to enhance returns. Another way is to reduce risks um. A third possible application is to get yourself exposure to a particular factor that you may believe that investors may believe may be a good time to invest in. So a number of applications to the smart beta phenomenon. Karen Kurwin, we are definitely smarter about beta than we were before we started this conversation. Here in a senior investment stratego
just at pro Shares. He's joining me Kathleen Hayes and my co host Pim Fox at B and Y Melons E t F Exchange sixteen here in Dana Pointe, California. This is Bloomberg