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Charlie Pellett, and that's a Bloomberg Business flash. You're listening, you're taking stock with Pim Box at Kathleen Hayes on Bloomberg Radio. This is taking stock. I'm Pim Fox. Well, what about exchange traded funds that say that they can outsmart the market? Well, that might be called smart beta. What is it? Does it really work? Let's find out more from Melissa Brown, Senior director of Applied Research at
Axioma Axioma's Buyer Beware Research. Tell us more about this, Melissa Brown, Hi, Yes, Well, the buyer beware really refers to um the fact that many funds, many of these so called smart beta E t F that have very similar names, let's say they all have high dividend yield in the name, actually look extremely different from each other. And alternately, when many have very similar names are very different names, they actually look quite similar to each other.
So you really need to dig a little deeper into what's driving the returns in the fund to really understand if you're getting something that's the same or different. Certainly, certainly sounds to sounds like it makes a perfect sense. But what if you could describe what is beta and what is smart beta when it comes to exchange traded funds. Ah. Yes, so beta refers to having some exposure to some source
of systematic return. In other words, if you think that stocks that are cheaper are going to outperform stocks that are more expensive, in other words, value stocks should do well, then um a stocks how it stock looks in terms of its value score or its exposure or um That is what it's beta is, its sensitivity to the movement
in that factor. Smart data is a term, and there's many other terms systematic beta and many other ways of describing this, but smart data is um a way of getting that kind of exposure, getting that kind of systematic return um to and using factors that are expected to outperform the market, whether it's value or momentum or high dived in yield or low volatility or you know. I could go on and on. There are many different categories, but those all kind of generally fall into this idea
of smart data. Would it also would would another not another but an additional definition of this? Would it be invest an investment strategy that puts the emphasis on the use of alternative index construction rules rather than more traditional UH market based industries like market capitalization or or market price. I mean doesn't that kind of it emphasizes capturing these factors or inefficiencies and then turning them into rules in
ways that people can understand exactly. So they may a manager may take let's say the hundred most attractive stocks and equally wait them, or they may wait them by their exposure. So the highest dividend yielding stock, it's the
highest weight in the portfolio. So there's there are a number of different ways, um that you can wait them that are you're, as you said, it's absolutely right, going to move them away from the index, or they're gonna look very different, even if they have the same names. That waiting scheme in and of itself is going to make them look very different. Why are they attractive now, Well, they are. First of all, many of these types of
portfolios have actually outperformed broader major market indices. So that's that's one reason. So they have that the performance wind at their backs. Another reason is that, um, I think personally that you put smart in the name of something and it at least attracts people's attention whether um, you know, whether in fact it's smart or not right full full
marks for marketing. Yes, exactly, exactly, And in fact, what a lot of these funds do are no different from what a lot of quantitatively driven or systematic managers have done for years and years and years. Uh. They've just kind of relabeled it and repackaged it into an e t F format, which does make it easier to buy and sell, makes it easier to buy and sell, and would ostensibly make these products less expensive when compared to
those managers you just described. Or is that inaccurate? Yes? No, No, Usually e t F T smart data e t F are less expensive. They because they're so rules based. You know, the rules are set up and they can just run. You don't really need a manager sifting through the stocks
that you might be buying and selling, for example. So they certainly can be cheaper and um and to some extent deliver a similar return, except for that you don't have that manager sifting through the stocks that are being bought and sold to see if maybe you don't necessarily want to buy this one or that one, Melissa, without without pushing you to indoors or or or in any way. Comment upond performance. Could you just give us an example of one of these smart beta ETFs and how they work?
Um Yeah, so one of the ones that we've done a recent study on our high dividend yield and we've we looked at a number of different flavors of high dividend yield um some are what's really interesting is their differences. So some are very heavily weighted in the energy sector, for example. Some may be much more heavily weighted in utilities. Some are much more evenly distributed across different kinds of sectors.
Um So. But the thing they have in common is they all have high dividend yields, but they get to that dividend yield in a different way. So that would be kind of one example of the type of fund that might be put under the label of smart beta. Thank you very much, Melissa Brown, Senior Director of Applied Research at Axioma telling us about their buyer beware research when it comes to smart beta et f s. Thank you for listening to taking Stock. I'm pim Fox and
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