Smart beta strategies present a method of investing that focuses on attaining Alpha, which is a term used to describe a strategy’s ability to beat the market. This is often done by combining passive and active investing strategies. Smart beta strategies generally seek optimal construction of a well-diversified portfolio with top investment products. Related investment approaches apply to asset classes including equities, fixed income, commodities and multi-asset classes. As an investor, you may be seeking out strategies that will lead to a perfect portfolio. Read on to discover smart beta strategies that will optimize your portfolio.
Examining the valuation of stocks within displays a stellar smart beta strategy for portfolio optimization. When an entity reports adequate net income, but their stock price remains relatively low, that stock’s valuation is considered high. Tailoring your strategies to this factor exposes you to companies with high growth potential. In addition, your fellow investors often overlook these companies. Therefore, you will have access to the highest value stock options. Surely, considering the value of stocks presents an incredible smart beta strategy.
To leverage a smart beta investing strategy, analyze the construction and methodology of various funds. For example, “low volatility” and “minimal volatility” names have similar names, but different fund construction. The former involves simply creating a portfolio of stocks with the lowest volatility. The latter involves creating a more diverse portfolio that’s characterized by lower volatility, though individual stocks within may be incredibly volatile. In addition, many fund firms should be able to summarize how their portfolio differs from others in terms of construction and methodology. Be wary of any that can’t, as well as any marketing materials that describe the funds as more customizable than they actually are. Absolutely, looking at details beyond simply the name of the portfolio presents an awesome smart beta strategy.
Low-volatility investing displays an additional smart beta strategy for portfolio optimization. Stocks with higher volatility levels tend to have lower average returns. Analysts have conducted many studies over the years that provide empirical evidence of this phenomenon. For example, a 2007 study by Blitz and van Vliet proved that low-volatility stocks had higher returns after risk-adjustment. An additional 2012 study by Baker and Haugen examined 33 markets from 1990-2011. They calculated the volatility of total return for each company in each market, and found that lower volatilities had both lower risks and higher returns. Therefore, research suggests that stock options with lower volatility levels are more prudent options. They tend to have higher returns, making them a more solid investment choice. This proven empirical evidence certifies focusing on lower volatility stocks as a great smart beta strategy.
Considering the size of the companies you’re investing in displays another smart beta strategy for optimizing your portfolio. Over longer periods of time, smaller company stocks have produced greater ROI’s than those from larger companies. One hypothesis for this phenomenon describes how smaller companies have more trouble staying afloat during recessionary periods. Therefore, they present more systematic risk. Think about taking on some of this risk and whether it is a prudent decision for your specific portfolio. Investors who turn their portfolios in the direction of smaller stock then see higher returns because they are taking on risk that can’t be diversified away. You can also use stock tracking software to help estimate your returns. Certainly, examining the size of the companies in your portfolio represents a great smart beta strategy.
Index weighting presents a final smart beta strategy for optimizing your portfolio. This strategy describes a departure from risk-return profiles and market-cap weights. There are several ways to categorize the components of your portfolio differently. For example, in equal weighting, index components are assigned equal weights. A second ranks and assigns entities based on measure of company size such as sales, cash flow, book value, and dividends. An additional example weighs single factors such as momentum. Consider the specifics of your smart beta portfolio and decide if such a weight categorization is right for it. Indubitably, you can change you portfolio index weighting to follow an incredible smart beta strategy.
There are a myriad of smart beta strategies that will surely help to optimize your stock portfolio. One such strategy involves examining the value of applicable stocks in order to have the quickest access to the best fits for your portfolio. Namely, asset-based lenders can help improve many business’s finances. A second strategy presents examining all aspects of the language used to describe your chosen portfolio. Third, consider the volatility levels of stocks within your portfolio, as lower volatilities tend to have higher returns. Thinking about the size of the companies you’re investing in presents a fourth strategy, as taking on some level of risk will lead to higher ROI’s. Finally, consider changing you portfolio components’ weightings to maximize returns on your specific portfolio. When searching for smart beta strategies to optimize your portfolio, consider the points above.