Alpha versus Beta
In this case, Alpha is not a planet or a constellation. In the world of investments, Alpha is understood as the fund’s excess profitability according to a reference index. For example an Alpha of 3% means that a fund gets a 3% additional return. Usually, Alpha and Beta are measured at the same time. Beta indicates the risk of a certain asset in relation to its benchmark. For instance, a stock or an asset with a 1.2 Beta would suppose a 20% higher risk than its reference index.
Then, what is Smart Beta?
As we already know from previous articles, most of ETFs and index funds have been designed to follow a certain index. Therefore, its Beta would tend to be around 1 by definition. However, the ETFs offer is increasing and a few years ago the so-called Smart Beta ETFs started to emerge. They have become a contradiction themselves after what we mentioned earlier.
Smart Beta ETFs can be considered as:
– ETFs designed to achieve different objectives such as increasing the profitability or reducing risk and volatility.
– Beta ETFs sit somewhere between managed investment funds and the passive management that ETFs represent by definition.
– With Smart Beta, exposure or bias to one or multiple investment strategies, values, moments, volatility, company dimensions or quality can be obtained at a low cost.
Inbestme’s scope for investment strategies:
Is it really necessary to search for the “Smart Beta”?
Not really. Nowadays there are enough options to consider without having to complicate your portfolio that much.
A clear disadvantage of using Smart Beta is their extra charges with regard to their sibling alternatives. Consequently, their objective must be achieved overcoming the extra charges and in some cases, this seems unlikely to happen. So, to base our portfolio on Smart Beta’s might not compensate itself. However, they usually have a significant differential on their cost what means that they still have a reasonable opportunity to accomplish their goal when compared to other active strategies.
Although Beta Smarts are not essential to use, they appear as a good alternative to achieve some of the objectives mentioned above. Inbestme uses Smart Betas selectively and as a complement to our diversified portfolios.
But we are looking for Alphas, aren’t we?
Go on searching.