Smart Beta Vs Factor Investing

Smart beta and factor investing are two terms often used interchangeably. These are both investing strategies that investors may use. However, there are various factors that differentiate both these investing strategies. Before understanding how they differ, it is critical to look at what each of these is.

What is Smart Beta Investing?

Smart beta investing is an investment strategy that allows investors to benefit from active and passive investing strategies. It combines both of these aspects to allow investors to maximize their gains. Smart beta portfolios are theoretically efficient compared to other portfolios. They try to strike a balance between the efficient market hypothesis and value investing.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

Smart beta investing seeks to achieve several objectives for investors. These may include low-risk investments, highly diversified portfolios with low cost, or alpha. This approach to investing applies to all well-known asset classes, including stocks, commodities, bonds, etc. The smart beta investing strategy stems from the work of Harry Markowitz through the modern portfolio theory.

What is Factor Investing?

Factor investing is another strategy used by investors. Unlike smart beta investing, factor investing involves investing in assets based on predetermined factors. Each investor will specify or decide on which attributes they want their investments to match. Once they do so, they can choose investments that relate to those factors. These factors will also decide whether the investments are successful in achieving investors’ goals.

There are two categorizations of factors that investors may consider during factor investing. These include macroeconomic and style factors. Macroeconomic factors seek to describe the risks associated with several asset classes. Style factors, on the other hand, explain the risks and rewards related to individual asset classes. Factor investing originates from the work of Fama and French as an asset pricing model.

What are the differences between Smart Beta and Factor Investing?

There are several characteristics that define and differentiate smart beta and factor investing. Both strategies have some commonalities, which can make them similar. However, there are some features that can separate them from each other as well. For investors, it is crucial to understand the differences between both of these to achieve their objectives.

Smart beta investing is a strategy that works with all popular asset classes. This approach to investing may emphasize achieving alpha, high diversification, or low-risk investments. For investors, it can help in building a portfolio with lower risks compared to traditional investing strategies. As mentioned, smart beta investing includes the advantages of both passive and active investing.

Smart beta investing follows specific rules which are also transparent. However, it seeks to identify ways in which investors can capitalize on any inefficiencies in the market. There are several investment factors that smart beta investing follows. These include value, quality, small size, momentum, and minimum volatility.

Factor investing, on the other hand, involves targeting specific return drivers across asset classes. As mentioned, these drivers may include macroeconomic and style factors. Each of these factors consists of various other investment factors within them. Through these, investors can achieve several objectives. These may include reduced volatility, diversification, and better returns.

Conclusion

Smart beta and factor investing are two common investment strategies that may confuse investors. Smart beta investing follows value investing and efficient market hypothesis. It involves a combination of active and passive investing strategies. On the other hand, factor investing focuses on achieving objectives that may come in the form of style or macroeconomic factors.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSEU struggles to agree Russian oil product price cap, seeks Friday deal
EU struggles to agree Russian oil product price cap, seeks Friday deal

BRUSSELS — EU countries will seek a deal on Friday on a European Commission proposal to set price caps on Russian oil products, after postponing a decision on Wednesday amid divisions between member states, diplomats said. The European Commission proposed last week that from Feb.…

Stay up-to-date with the latest news - click here
LATEST NEWSBiden moves to slash U.S. credit card fees, app charges
Biden moves to slash U.S. credit card fees, app charges

WASHINGTON, Feb 1 (Reuters) – President Joe Biden on Wednesday unveiled fresh efforts to slash credit card late fees and drive down the prices that Apple Inc and Google parent Alphabet Inc charge on mobile app stores. The move is part of a larger policy…

Stay up-to-date with the latest news - click here
LATEST NEWSLate Subway co-founder’s stake donated in potential tax shield
Late Subway co-founder’s stake donated in potential tax shield

NEW YORK — Subway’s late co-founder has left his 50% stake in the sandwich chain to his philanthropic foundation, protecting billions of dollars in proceeds from the company’s potential sale from the reach of the U.S. tax authorities. The Peter and Carmen Lucia Buck Foundation…

Stay up-to-date with the latest news - click here
LATEST NEWSFed raises rates a quarter point, expects 'ongoing' increases
Fed raises rates a quarter point, expects 'ongoing' increases

The Federal Reserve on Wednesday released its decision on interest rates following its two-day meeting.

Stay up-to-date with the latest news - click here
LATEST NEWSTrump starts 3rd White House bid lagging in campaign cash
Trump starts 3rd White House bid lagging in campaign cash

NEW YORK (AP) — Former President Donald Trump’s political operation started the year with about $25 million socked away for his recently launched 2024 presidential campaign, a sum that is substantially less than what he had on hand just one year ago, new campaign finance…

Stay up-to-date with the latest news - click here

Leave a Reply