Being Smart

Is smart beta the future?

Beta is a measure of risk. If a stock has a beta of one, it goes up and down by the same percentage, day-to-day, as the market does. Investment portfolios have a beta component, which corresponds to their general exposure to a broad market average, like the S&P 500. By definition, if you own an index of the entire market, your beta is one.

Smart beta is a rules-based approach that reduces costs by limiting investment discretion. It is attractive because it is inexpensive and has the potential to add value when compared to traditional active management. It’s is a way to have broad market exposure and diversification but not hold the same weightings as the general index. Fundamental indexing, that holds companies in proportion to their earnings, or revenues, or dividends, is one such approach. So are sector allocation limits.

The key is the cost to the investor. If these managers charge just as much as the average mutual fund—1 ½ percent—then the lower costs of these strategies lining the manager’s pocket. But if the fees are lower, then investors benefit.

Smart beta can be a reasonable way to limit expenses and grow returns. But don’t be dumb about reading the fine print!

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2014-04-18T10:06:03+00:00April 18th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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