WEBVTT - Melissa Brown on Smart Beta ETFs (Audio)

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<v Speaker 1>Charlie Pellett, and that's a Bloomberg Business flash. You're listening,

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<v Speaker 1>you're taking stock with Pim Box at Kathleen Hayes on

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<v Speaker 1>Bloomberg Radio. This is taking stock. I'm Pim Fox. Well,

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<v Speaker 1>what about exchange traded funds that say that they can

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<v Speaker 1>outsmart the market? Well, that might be called smart beta.

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<v Speaker 1>What is it? Does it really work? Let's find out

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<v Speaker 1>more from Melissa Brown, Senior director of Applied Research at

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<v Speaker 1>Axioma Axioma's Buyer Beware Research. Tell us more about this,

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<v Speaker 1>Melissa Brown, Hi, Yes, Well, the buyer beware really refers

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<v Speaker 1>to um the fact that many funds, many of these

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<v Speaker 1>so called smart beta E t F that have very

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<v Speaker 1>similar names, let's say they all have high dividend yield

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<v Speaker 1>in the name, actually look extremely different from each other.

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<v Speaker 1>And alternately, when many have very similar names are very

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<v Speaker 1>different names, they actually look quite similar to each other.

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<v Speaker 1>So you really need to dig a little deeper into

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<v Speaker 1>what's driving the returns in the fund to really understand

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<v Speaker 1>if you're getting something that's the same or different. Certainly,

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<v Speaker 1>certainly sounds to sounds like it makes a perfect sense.

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<v Speaker 1>But what if you could describe what is beta and

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<v Speaker 1>what is smart beta when it comes to exchange traded funds. Ah. Yes,

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<v Speaker 1>so beta refers to having some exposure to some source

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<v Speaker 1>of systematic return. In other words, if you think that

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<v Speaker 1>stocks that are cheaper are going to outperform stocks that

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<v Speaker 1>are more expensive, in other words, value stocks should do well,

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<v Speaker 1>then um a stocks how it stock looks in terms

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<v Speaker 1>of its value score or its exposure or um That

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<v Speaker 1>is what it's beta is, its sensitivity to the movement

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<v Speaker 1>in that factor. Smart data is a term, and there's

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<v Speaker 1>many other terms systematic beta and many other ways of

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<v Speaker 1>describing this, but smart data is um a way of

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<v Speaker 1>getting that kind of exposure, getting that kind of systematic

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<v Speaker 1>return um to and using factors that are expected to

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<v Speaker 1>outperform the market, whether it's value or momentum or high

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<v Speaker 1>dived in yield or low volatility or you know. I

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<v Speaker 1>could go on and on. There are many different categories,

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<v Speaker 1>but those all kind of generally fall into this idea

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<v Speaker 1>of smart data. Would it also would would another not

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<v Speaker 1>another but an additional definition of this? Would it be

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<v Speaker 1>invest an investment strategy that puts the emphasis on the

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<v Speaker 1>use of alternative index construction rules rather than more traditional

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<v Speaker 1>UH market based industries like market capitalization or or market price.

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<v Speaker 1>I mean doesn't that kind of it emphasizes capturing these

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<v Speaker 1>factors or inefficiencies and then turning them into rules in

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<v Speaker 1>ways that people can understand exactly. So they may a

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<v Speaker 1>manager may take let's say the hundred most attractive stocks

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<v Speaker 1>and equally wait them, or they may wait them by

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<v Speaker 1>their exposure. So the highest dividend yielding stock, it's the

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<v Speaker 1>highest weight in the portfolio. So there's there are a

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<v Speaker 1>number of different ways, um that you can wait them

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<v Speaker 1>that are you're, as you said, it's absolutely right, going

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<v Speaker 1>to move them away from the index, or they're gonna

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<v Speaker 1>look very different, even if they have the same names.

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<v Speaker 1>That waiting scheme in and of itself is going to

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<v Speaker 1>make them look very different. Why are they attractive now, Well,

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<v Speaker 1>they are. First of all, many of these types of

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<v Speaker 1>portfolios have actually outperformed broader major market indices. So that's

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<v Speaker 1>that's one reason. So they have that the performance wind

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<v Speaker 1>at their backs. Another reason is that, um, I think

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<v Speaker 1>personally that you put smart in the name of something

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<v Speaker 1>and it at least attracts people's attention whether um, you know,

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<v Speaker 1>whether in fact it's smart or not right full full

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<v Speaker 1>marks for marketing. Yes, exactly, exactly, And in fact, what

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<v Speaker 1>a lot of these funds do are no different from

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<v Speaker 1>what a lot of quantitatively driven or systematic managers have

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<v Speaker 1>done for years and years and years. Uh. They've just

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<v Speaker 1>kind of relabeled it and repackaged it into an e

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<v Speaker 1>t F format, which does make it easier to buy

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<v Speaker 1>and sell, makes it easier to buy and sell, and

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<v Speaker 1>would ostensibly make these products less expensive when compared to

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<v Speaker 1>those managers you just described. Or is that inaccurate? Yes? No, No,

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<v Speaker 1>Usually e t F T smart data e t F

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<v Speaker 1>are less expensive. They because they're so rules based. You know,

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<v Speaker 1>the rules are set up and they can just run.

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<v Speaker 1>You don't really need a manager sifting through the stocks

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<v Speaker 1>that you might be buying and selling, for example. So

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<v Speaker 1>they certainly can be cheaper and um and to some

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<v Speaker 1>extent deliver a similar return, except for that you don't

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<v Speaker 1>have that manager sifting through the stocks that are being

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<v Speaker 1>bought and sold to see if maybe you don't necessarily

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<v Speaker 1>want to buy this one or that one, Melissa, without

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<v Speaker 1>without pushing you to indoors or or or in any way.

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<v Speaker 1>Comment upond performance. Could you just give us an example

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<v Speaker 1>of one of these smart beta ETFs and how they work?

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<v Speaker 1>Um Yeah, so one of the ones that we've done

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<v Speaker 1>a recent study on our high dividend yield and we've

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<v Speaker 1>we looked at a number of different flavors of high

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<v Speaker 1>dividend yield um some are what's really interesting is their differences.

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<v Speaker 1>So some are very heavily weighted in the energy sector,

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<v Speaker 1>for example. Some may be much more heavily weighted in utilities.

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<v Speaker 1>Some are much more evenly distributed across different kinds of sectors.

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<v Speaker 1>Um So. But the thing they have in common is

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<v Speaker 1>they all have high dividend yields, but they get to

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<v Speaker 1>that dividend yield in a different way. So that would

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<v Speaker 1>be kind of one example of the type of fund

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<v Speaker 1>that might be put under the label of smart beta.

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<v Speaker 1>Thank you very much, Melissa Brown, Senior Director of Applied

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<v Speaker 1>Research at Axioma telling us about their buyer beware research

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<v Speaker 1>when it comes to smart beta et f s. Thank

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<v Speaker 1>you for listening to taking Stock. I'm pim Fox and

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