How intelligent is Smart-Beta

Smart beta ETFs are said to be corrupting the basic ideas of ETFs to establish a simple and cost efficient access to capital markets. Checking the facts about the criticism on this more and more attractive product category.

According to Morningstar, 32 percent of investors have an allocation in smart beta ETFs. Those account on average for less than 10 percent of equity portfolios. Smart beta products invest thereby not as ETFs in an index but include risk factors, such as volatility, to generate higher risk adjusted returns.

One criticism on smart beta ETFs is that they are no longer offering a simple access to capital markets. As they do not just replicate an index but include risk factors, the complexity of products increases.
In reality, this critique is often false and misleading. Most products define an investment universe and select the shares that perform best or worse according to a criterion. Only if more than one factor is included and weighted in a product, it becomes less transparent.

Another criticism includes that smart beta products are more expensive than standard ETFs and thus do not allow investors to access the market inexpensively.
Because the ETF market is very homogenous, a distinctive criterion for investors is the price of the product. This reduces the price for ETFs and forces asset managers to look for attractive niches where higher prices can be charged. Potentially, less competition makes smart beta products more expensive but attractive products are likely to be copied by competitors, which will decrease the price for them in the end.