Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim
Speaker 1: Fox on Bloomberg Radio. We are broadcasting from the b
Speaker 1: n Y Melan E t F Symposium in Data Point
Speaker 1: to California. I'm Pim Fox, my co host Kathleen Hayes.
Speaker 1: Joining us now is Karen Kerwin. He is a senior
Speaker 1: investment strategist for pro Shares. Karen, thanks very much for
Speaker 1: being here. Great to be here. Smart Beta. You've got
Speaker 1: to help me understand what exactly this is because I
Speaker 1: keep hearing how this is a big turning point for
Speaker 1: a smart beta evaluation. How do you describe it to people? Yeah,
Speaker 1: and I heard you mentioned before it is a bit
Speaker 1: of an unfortunate term because it would imply, of course
Speaker 1: that if everything other than smart beta would be dumb.
Speaker 1: Of course that is exactly that is not the case.
Speaker 1: But uh, the genie is out of the bottom a
Speaker 1: little bit, so we are to some extent stuck with
Speaker 1: that term. You know, I think there's there's two ways
Speaker 1: to really think about smart beta um, and it's not
Speaker 1: really all that complicated. It's been around for a long time.
Speaker 1: One of which is to just describe it as any
Speaker 1: type of investment strategy right that doesn't rely on a
Speaker 1: market capitalization waiting like the SP like the SMP five hundred,
Speaker 1: which takes its price divided by the SHARE's outstanding and
Speaker 1: you get a weight you know, in all these securities. UM.
Speaker 1: So a simple take on that would be UM the
Speaker 1: SMP five hundred equally, way to take all the SMP
Speaker 1: five names and instead of market cap waiting them, uh,
Speaker 1: you equally wait them. That is by definition one form
Speaker 1: of smart beta UM. But really the other way to
Speaker 1: think about it is investment strategies that look to exploit
Speaker 1: a so called factor or thing, a dynamic, a characteristic
Speaker 1: in the marketplace that have explained returns over time. And
Speaker 1: I just want you to continue down this path because
Speaker 1: last a year ago here at in a point at
Speaker 1: the bing My melanconference, I moderate a smart beta panel.
Speaker 1: So to even understand it, I had to read a
Speaker 1: lot of different things. And it's this whole point of
Speaker 1: looking returns and then also bringing in quantitative models. How
Speaker 1: does that part of it work? Sure, it's it's understanding
Speaker 1: what's driven returns over over time, So understanding things like size.
Speaker 1: You know, for example, stocks with a smaller size may
Speaker 1: have delivered performance over time, things like low volatility. Right,
Speaker 1: Stocks that have demonstrated low levels of volatility over time
Speaker 1: have in fact explained much of stock market returns. So
Speaker 1: is it a case then where you take you're still
Speaker 1: going to have a certain maybe take part of the
Speaker 1: s and P find to do something, and you just
Speaker 1: add in a couple more of these themes or realities
Speaker 1: to juice up the return that you would have if
Speaker 1: you do and have the smartness in there. Sure, So
Speaker 1: it's it's applying a specific factor to a group of
Speaker 1: stocks with the hopes of identifying or tilting your portfolio
Speaker 1: to get exposure to a particular factor that you may
Speaker 1: want uh to exploit in a particular period of time. Dividends,
Speaker 1: for example, would be a good example. Everybody wants exposure
Speaker 1: in this type of market environment two companies that pay dividends,
Speaker 1: so dividends in a way are considered a factor, and
Speaker 1: dividends in this case would be the smart beta strategy
Speaker 1: correct is one example. There are many factors out there
Speaker 1: that academics that practitioners have defined and created investment strategies around. Um.
Speaker 1: The purest kind of definition of smart beta would rely
Speaker 1: on probably more of a handful of factors, um. But again,
Speaker 1: in practice there are many many factors that are being
Speaker 1: employed over the last year. Then, since we were here,
Speaker 1: what what are one or two? What are a couple
Speaker 1: of the smart beta tactic strategies that have worked especially well? Sure,
Speaker 1: so I mentioned one of them already, which would be dividends, right,
Speaker 1: Companies that pay dividends. For example, people looking to replace
Speaker 1: some of their income needs in their portfolio at a
Speaker 1: time when interest rates are very low, people are looking
Speaker 1: for the stocks that pay dividends as a way to
Speaker 1: compliment them in their portfolio. Another great example, um, would
Speaker 1: be low volatility stocks. Right. And those are kind of
Speaker 1: different complimentary in some ways, um, And they're more probably
Speaker 1: risk focused in nature, meaning that people who are looking
Speaker 1: to perhaps protect gains in the stock market over the
Speaker 1: last couple of years are looking to identify stocks that
Speaker 1: have a low level of volatility in hopes that they
Speaker 1: will outperform. Now, just to understand a little bit more
Speaker 1: in depth, you can you who's the smart beta philosophy
Speaker 1: internally inside the portfolio? Correct? I mean you can say, okay,
Speaker 1: here's my portfolio. Let's say you were I'm not suggesting
Speaker 1: you should be a hundred invested in long biotech. Then
Speaker 1: you could go and look for an E t F
Speaker 1: that would mitigate some of the volatility or risk, and
Speaker 1: as a result that would work as a smart beta,
Speaker 1: but within the portfolio, not necessarily worrying about the absolute
Speaker 1: performance outside correct. Yeah, you can employ smart beta strategies
Speaker 1: in many different contexts in your portfolio. One way is
Speaker 1: to enhance returns. Another way is to reduce risks um.
Speaker 1: A third possible application is to get yourself exposure to
Speaker 1: a particular factor that you may believe that investors may
Speaker 1: believe may be a good time to invest in. So
Speaker 1: a number of applications to the smart beta phenomenon. Karen Kurwin,
Speaker 1: we are definitely smarter about beta than we were before
Speaker 1: we started this conversation. Here in a senior investment stratego
Speaker 1: just at pro Shares. He's joining me Kathleen Hayes and
Speaker 1: my co host Pim Fox at B and Y Melons
Speaker 1: E t F Exchange sixteen here in Dana Pointe, California.
Speaker 1: This is Bloomberg