There’s No Debating the Intelligence of “Smart Beta”

Lifting the veil on this evolving topic

Exchange-traded funds (ETFs) are continuing their ascent in the Canadian marketplace, which comes as no surprise given their inherent transparency, relatively low cost and liquidity - not to mention their ability to find a comfortable fit in almost any portfolio. From the cautious buy-and-hold investor to the more aggressive opportunity seeker, the ETF universe is expanding to meet the needs of all investor types.

ETFs are getting more specialized too. There is a fairly new type of ETF on the street - one that looks beyond systematic risk (beta) to other factors that tend to impact relative performance. It is called “smart beta.” While the use of this term remains contentious (given the concern that by referring to these as “smart”, individuals may perceive traditional ETFs as “dumb”), all smart beta ETF providers have one belief in common: that market capitalization does not capture all of the relevant information about a company’s value and potential.

Smart beta ETFs strive to deliver superior risk-adjusted returns for investors, while addressing concerns that cap-weighted indices will potentially expose them to overvalued stocks and higher volatility. As a result, the smart beta market segment is growing rapidly. Some of the most well-known index providers in the world, including Morningstar, MSCI, and Russell Investments, are focused on creating sophisticated, smart beta indices to meet the evolving needs of investors.

At First Asset, smart beta indexation means “factor-based” investing. Factors are the empirically validated characteristics of stocks that demonstrate a market-cap-weighted portfolio is not the only, nor necessarily the best, way to hold a portfolio. Several of these First Asset ETFs are built using Morningstar® CPMSTM - Morningstar’s proprietary equity research platform that integrates fundamental and technical data with analysts’ earnings estimates for over 3,600 Canadian and U.S. stocks. First Asset has created ETFs that aim to replicate Morningstar Indexes using quantitative models that capture value, momentum, or dividend effects for Canadian investors.

For example, CI First Asset Morningstar Canada Momentum Index ETF (TSX: WXM) and CI First Asset Morningstar Canada Value Index ETF (TSX: FXM) are designed to provide diversified exposure to Canadian issuers that have demonstrated, among other things, positive momentum in earnings and price (in the case of WXM), and “value” characteristics like low price to book and low price to earnings (for FXM). For investors who value these highly important qualities when investing in a company, WXM and FXM are effective solutions to replace or supplement a traditional cap-weighted ETF.

First Asset offers other smart beta (factor-based) ETFs that are focused on the volatility factor, including: CI First Asset MSCI Canada Low Risk Weighted ETF (TSX: RWC), CI First Asset MSCI Europe Low Risk Weighted ETF (TSX: RWE), CI First Asset MSCI USA Low Risk Weighted ETF (TSX: RWU) and CI First Asset MSCI World Low Risk Weighted ETF (TSX: RWW). All of First Asset’s foreign ETFs are available in hedged and unhedged versions.

While any controversy over the term “smart beta” may remain a topic of conversation for some time, the benefits of incorporating smart beta strategies - or factor-based ETFs - into an investment portfolio are clear. When seeking an indexing strategy that offers the potential for superior risk-adjusted returns, smart beta works.

Important information about each CI ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at Commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.