Strategic Beta in EM: Cost Efficient Performance
What is strategic beta? We define strategic beta (also known as “smart beta”) as a category of beta strategies designed to outperform a market benchmark or provide a specialized exposure. These strategies incorporate attributes of traditional active and passive management. Like active managers, strategic beta strategies are informed by investment insight – they can be built on macroeconomic investment themes or use fundamental metrics to evaluate company selections. These themes or metrics are then defined as transparent, repeatable “rules” for the portfolio and, like conventional passive strategies, strategic beta follows these rules. In many ways, strategic beta is effectively a rules-based investment process that reflects the systematization of alpha drivers in active management.
Delivering cost efficient performance in emerging markets. In addition to providing benchmark differentiation, EM strategic beta funds have provided performance in line (or slightly better) than active managers, but with an expense ratio more comparable to traditionally passive funds. To take cost into consideration with alpha, we have defined the “Alpha Cost Efficiency Ratio” (ACE Ratio), a ratio that divides the alpha by the prospectus net expense ratio. Of course, conventional passive ETFs have a negative ACE Ratio, which makes sense since a benchmark-based strategy provides no alpha by definition. On the other hand, strategic beta ETFs had an ACE Ratio that is more than twice that of active mutual funds, and have demonstrated a consistency of outperformance, with alphas of 2.67% over one year, 2.87% over three years and 2.60% over five years. This data illustrates that strategic beta ETFs have been able to execute improved returns in a cost efficient manner.
Read more on Strategic Beta.
Conventional Passive ETFs are any ETFs that use a capitalization weighted index and whose constituents are filtered by little more than cap size or country of domicile. Funds that currency hedge this exposure are also categorized as conventional. Strategic Beta ETFs are any ETFs that use an index designed to outperform (via return or risk) a conventional benchmark, or to provide specific exposure beyond country and/or cap. Active Mutual Funds represent mutual funds that employ individuals or teams to conduct fundamental and/or macroeconomic research to select individual companies that together make up these portfolios.
Categories
Popular Articles
Sign Up for Emerging Perspectives Posts
Disclosure
Emerging market investments involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, from economic or political instability in other nations or increased volatility and lower trading volume. Please call +1 888 800 4347 or click here access a prospectus online. Investing involves risk, including possible loss of principal.
Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses, which could reduce returns. Indexes are unmanaged and one cannot invest directly in an index. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance data may be higher or lower than actual data quoted. For the most current index performance data please call + 1 888 800 4347.
The content of this material is presented for general information purposes only. The statements and opinions expressed are those of the author and are as of the date of this material. All information is historical and not indicative of future results, and subject to change. Readers should not assume that an investment in the securities mentioned above was or would be profitable in the future. This information is not a recommendation to buy or sell. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and it should not be relied on as such or be the basis for an investment decision. This material may include estimates, projections and other "forward-looking statements". Emerging Global Advisors, LLC assumes no duty to update any such statements. Due to numerous factors, actual events may differ substantially from those presented. Past performance does not guarantee future results.
EGA and EGShares Funds are distributed by ALPS Distributors, Inc. Emerging Global Advisors acts as the investment advisor to the EGShares Funds. ALPS and Emerging Global Advisors are unaffiliated entities.
Emerging market investments involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, from economic or political instability in other nations or increased volatility and lower trading volume. Please call +1 888 800 4347 or click here access a prospectus online. Investing involves risk, including possible loss of principal.
Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses, which could reduce returns. Indexes are unmanaged and one cannot invest directly in an index. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance data may be higher or lower than actual data quoted. For the most current index performance data please call + 1 888 800 4347.
The content of this material is presented for general information purposes only. The statements and opinions expressed are those of the author and are as of the date of this material. All information is historical and not indicative of future results, and subject to change. Readers should not assume that an investment in the securities mentioned above was or would be profitable in the future. This information is not a recommendation to buy or sell. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and it should not be relied on as such or be the basis for an investment decision. This material may include estimates, projections and other "forward-looking statements". Emerging Global Advisors, LLC assumes no duty to update any such statements. Due to numerous factors, actual events may differ substantially from those presented. Past performance does not guarantee future results.
EGA and EGShares Funds are distributed by ALPS Distributors, Inc. Emerging Global Advisors acts as the investment advisor to the EGShares Funds. ALPS and Emerging Global Advisors are unaffiliated entities.
© Copyright 2016 Emerging Global Advisors, LLC. All rights reserved. EGA®, EGSharesSM, EGAI® are service marks of Emerging Global Advisors, LLC. All other trademarks, service marks or registered trademarks are the property of their respective owners..