Forum Views - June 2024
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FORUM VIEWS - JUNE 2024
nvestors across the world are moving towards putting their
money into passive funds for their simplicity, low fees, and
Igreater consistency in returns. In India too, large-cap fund
managers are finding it increasingly difficult to beat their
benchmark indices, and investors are getting drawn towards
index-style investing as the trends shift to Replicating market
returns rather than beating them.
There are several effective strategies to target certain risk and
return profiles, such as Smart Beta Funds, which have been
gaining a lot of popularity over the past few years. Smart Beta
Funds aim to bridge the gap between active and passive funds
by using a rule-based investing strategy that combines the
principles of both. In fact, recent trends suggest a growing
interest in Smart Beta.
Smart Beta Funds, also known as factor-based are a type of
investment fund that aims to outperform traditional index
funds by using a rules-based approach to construct a portfolio.
These funds are a hybrid between active and passive investing
strategies, as they rely on rules or algorithms to select and
weight securities, rather than simply tracking a market index.
Factor indexes are designed to help investors seeking to
capture the excess return of factors in a cost-effective and
transparent manner. A product giving exposure to only one of
these factors is called as single factor exposure whereas
product giving exposure to more than one factor is called
multi-factor exposure. Due to the historical cyclicality of
factors, investors may choose to diversify away from a single
factor and participate in multi-factor index.
Global ETF market is witnessing a remarkable growth. At the
end of February,2024 the global AUM reached a milestone of
1. What exactly are Smart Beta Funds, and how are they
different from traditional index funds or ETFs, how these
funds are structured?
2. How Smart beta fund are doing globally, what is the
trend among global investors towards these products?
12.3 trillion dollar with a diverse portfolio of 12,063 ETF
product. Conventinal ETFs constitute 79.57% and Factor
Based ETF are placed at 20.43%. Globally, there are more than
1,300+ smart-beta product with more than US $ 1.5 trillion.
So smart-beta products are widely used by the investor
across the globe.
Smart Beta Funds can be suitable for investors with some
expertise in capital markets, there are also simpler Smart
Beta strategies that may be more accessible to mas market
investors. These strategies may focus on well-known factors
such as low volatility or dividend yield and may be easier for
less experienced investors to understand and implement.
The suitability of Smart Beta Funds depends on an investor's
individual circumstances, risk tolerance, investment goals,
and level of understanding of the product. Investors should
carefully evaluate Smart Beta Funds in the context of their
overall investment strategy and seek advice from financial
professionals if needed.
Lack of differentiation within active funds, underperformance
of large cap funds and cost-effective alternatives have led to a
structural change for the smart beta investing landscape in
India. As on Feb 29, 2024, there are 27 smart beta ETFs
managing total assets worth 4,697 Cr and 30 index funds
managing total assets worth 12,097 Cr. In the last 2 years,
there have 37 new product launches within the passive smart
beta category. In the last one year itself, passive smart beta
funds have seen inflows worth 6,007 Cr across different
categories. Momentum/Alpha, Low Volatility and equal
weight are the three most popular categories within the
smart-beta space right now. Mostly this on back drop of
3. What kind of investors are they suited for - the mass
investor or those with some expertise in capital markets
who can understand the product well?
4. How are we seeing fund flows going up in this
category, what are the visible trends emerging?
Saket Kumar
Co-Founder
ETF Junction
EXPLORING SMART BETA INVESTING
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