Take the lead: Investing in strategic beta and benchmarks

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Advisors: Help your clients understand the risks and potential rewards of index-oriented products that are strategically constructed to meet investor goals.

The background

Investors have flocked to passive “benchmark” investing in order to match benchmark returns through low-cost products. But these benchmarks were designed to be a reference point that serves as a basis for comparison, not with a specific investor goal in mind. For investors who want to both meet a specific investment goal and manage costs, a strategic beta fund may be worth considering.

How investors can approach strategic beta

  • Consider investment goals — and whether a passive ETF will help reach them.

Purely passive ETFs are built to mirror a benchmark like the S&P 500. However, many benchmarks were constructed as a point of reference, not an investment road map. Unless an investor’s goal is to track all the ups and downs in the market, a purely passive product may fall short.

  • Leverage an economical cost option built by investment experts.

A strategic beta fund can be constructed based on a benchmark as well, but with modifications to meet specific investment objectives such as return enhancement or reducing volatility. Once the methodology is established, the strategy is implemented systematically, which helps keep costs down.

  • Focus on specific long-term goals and manager skill, not jargon.

While strategic beta strategies can be constructed around specific market factors (like value) or thematically (like low volatility), we believe the conversation should focus on investor goals and investment manager expertise.

  • Understand where strategic beta falls in terms of risk and performance.

On the spectrum between alpha (outperformance versus a benchmark) and beta (matching the return of a benchmark), strategic beta will lie in the middle. It allows investors to pursue alpha in the low-cost structure of a passive ETF.