Getting Smarter About Smart Beta


Smart beta remains one of the fastest-growing corners of the exchange-traded funds market. Within this rapidly growing space, multi-factor ETFs are taking hold, perhaps offering investors a smarter interpretation of smart beta.

The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSE:GSLC) is asserting itself as a dominant name among the burgeoning group of multi-factor ETFs. In the case of GSLC, the ETF offers investors exposure to the value, momentum, quality and low volatility factors.

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Diamond In The Rough

GSLC tracks the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index, which seeks to capture common sources of active equity returns, including value (i.e., the security's price compared to market value), momentum (i.e., performance history), quality (i.e., profitability relative to total assets) and volatility (i.e., consistency of returns), according to Goldman.

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One of the primary aims of GSLC and other multi-factor ETFs is to help investors avoid the temptation of factor timing by offering exposure to multiple factors. Simply put, there are times when some factors outperform others, but without the benefit of time travel, investors are not likely to know exactly when a particular factor will be in favor and when it will be out of style.

There are other reasons to consider the multi-factor approach.

Some in the industry argue that certain smart beta strategies suffer from crowding and high valuations. Others ask whether the typical smart beta strategy improves upon market-weight investing at all. In our view, investors who tap into a range of strategy types can sidestep some of these issues and avoid over-emphasis on any single smart beta approach, said GSAM in a recent note.

With GSLC focusing on factors such as good value, strong momentum, high quality and low volatility, there is reasonable chance investors in this ETF will not need to worry about timing individual factors or the biases that come along with single factor approaches.

The Role Of Equal Weighting

Equal weighting factors can also provide the opportunity, over the long term, for out-performance of traditional benchmarks such as the S&P 500.

The equal-weight blend outperformed the S&P 500 Index the majority of the time, while also avoiding the relative highs and lows of individual smart beta approaches. This is consistent with our expectation that a blend of strategies may deliver a more consistent investment experience, at least in a relative sense versus market indices and versus a narrower smart beta exposure, added GSAM.

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