What To Know Before Buying Smart-Beta Funds

The following excerpt is from an article that originally appeared on Guns Gold Bullets

During a MarketWatch panel on smart-beta earlier this year, a variety of issues were discussed regarding smart beta. Two of the issues I discussed warrant further explanation: active fees and portfolio construction.

Active fee

Investors can purchase U.S. equity ETFs (i.e. the S&P) for very little — 3 to 5 basis points. The minute an investor branches off into the world of portfolios that aren’t market-capitalization weighted, often labeled “smart beta,” these investors will be asked to pay a higher fee for this “smarter,” or active, portfolio.

Ideally, the premium paid for the active management is justified because the strategy is unique, but how unique is the active strategy? If a strategy is essentially a clone of the S&P 500, then a 10 basis point management fee is expensive, whereas if the strategy is dramatically different than the S&P 500 a fee of 100 basis points may be justified.


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