Smart Beta
Smart Beta

Market adversity highlights smart beta’s diversity

Reflecting on a recent panel discussion on “Strategic” or “Smart” Beta with Charles Schwab in New York City, I was struck by the uncanny timing of this event: October 15. The day many market pundits would point to as the recent bottom to the stock markets’ autumn swoon. You couldn’t have picked a better moment to highlight precisely why many investors have embraced smart beta. Investors have adopted these new indexes for the additional utility they can offer beyond traditional market measurement; specifically return enhancement, risk reduction, income generation and portfolio diversification.

Take, for example, how the Russell Low Volatility Indexes1 have historically performed relative to their small and large-cap market capitalization-weighted counterparts. Explained in this white paper by Russell Indexes Investment Strategist David Koenig; essentially, through up and down markets, Russell Low Volatility indexes performed true to form by providing investors with reduced volatility compared to market cap-weighted indexes.

That’s just one example of how investors can use smart beta to achieve a specific investment objective. And as our esteemed panel – which included experts from co-sponsor Charles Schwab, Guggenheim Investments, Invesco PowerShares®, WisdomTree® and Research Affiliates – discussed, effective implementation of a broad set of smart beta strategies is the next frontier.

Depending on investors’ exact needs and desired outcomes, the diversity of smart beta indexes promises to help  offer investors some of the most compelling use cases in modifying the exposures of an existing portfolio or in combining several smart beta indexes within their own portfolio. Russell Indexes Senior Research Director Tom Goodwin captures a series of examples in our upcoming Smart Beta Guidebook, designed to educate investors on the rapidly expanding universe of smart beta strategies.

The possibilities are intriguing. Tom explores several examples of how investors can seek to achieve various outcomes by combining:

  •  Quality, value and low-volatility factors to createA Buffett Portfolio
  • Fundamental and Equal Weight with Momentum to improve downside protection
  • Equal Weight with Low Volatility to reduce draw downs
  • GeoExposure for investors seeking indirect exposure to emerging markets

As Tom notes, investors and advisors understand that many sources of systematic return – generically called “beta” – can be sharply focused into an index form and used to shape the risk profile of an equity portfolio and provide for unique return patterns over a market cycle.

Said another way, with a growing anthology of use cases, it’s easy to understand why investors have begun to embrace smart beta strategies in a variety of ways, individually and in tandem. The industry has innovated to expand the set of tools available to investors to better address the heightened challenges they face in an increasingly complex and volatile market environment. This newer set of tools is one that investors may want to consider as part of a multi-asset approach to investing.


1 Russell Low Volatility Indexes consist of U.S. large cap and small cap indexes that seek to deliver lower volatility than their parent Russell 1000® or Russell 2000® Indexes, respectively. These indexes use an objective, transparent construction approach designed to deliver focused exposure to portfolios of stocks with low total return variability over the last 252 trading days. Each index is weighted by inverse volatility, so that the stock with the lowest volatility has the largest weight. To help maintain consistent exposure to low volatility stocks, each index is rebalanced monthly—with targeted limits on turnover.