“When I hear ‘smart beta,’ it makes me sick.” So said economist and Nobel Prize-winner William Sharpe after he was asked at a conference last year for his thoughts on strategies of this type.
And while much, if not the vast majority, of what Wall Street terms “smart beta” makes me sick as well, one can make the mistake of throwing the proverbial baby out with the bathwater. Unfortunately, that’s what I believe Sharpe and many others are doing.
I’ve previously explained why most of what is called smart beta is really nothing more than a marketing gimmick. It’s simply the result of loading on factors (such as size, value, momentum and profitability/quality) other than the market beta. In other words, most smart-beta products aren’t delivering alpha, just beta on other factors.
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