Schwab Intelligent Portfolios June 29, 2018

    How smart is smart beta? To help answer that question, it might be useful to hear directly from investors who are actually using these strategies. To that end, FTSE Russell, a leading global index provider, conducted its fifth annual survey of institutional asset owners in early 2018 to gather data on their usage of and satisfaction with smart beta strategies.1

    The recently published results of that survey are telling. Institutional investors who are using smart beta strategies report high levels of satisfaction and plan to increase their allocations over time. Approximately 62% of those using smart beta reported that they are either "Satisfied" or "Very Satisfied" with these strategies and their "ability to deliver on intended investment outcome."  In addition, 92% of those using smart beta strategies also said that they plan to increase or maintain their allocations.

    The percentage of institutional asset owners using smart beta strategies has grown significantly in recent years. Among those with at least $10 billion in AUM, approximately 56% are currently using smart beta vs. 42% in 2015. And among those not yet using smart beta strategies, 54% said they plan to make an allocation in the near term.

    Not all smart beta strategies are created equally

    While smart beta is seeing growing usage, it's important to understand that not all smart beta strategies are created equally. Smart beta is a broad and growing category of index-based strategies that generally take a different approach in their construction than traditional indexes such as the S&P 500® Index. But that includes many different strategies, some of which might have investment merit and many of which likely do not.

    Within that broader category, fundamental indexing is widely recognized as a pioneer in smart beta and is among the most widely adopted smart beta strategies. Since its introduction approximately a decade ago, fundamental indexing has shown a history of delivering enhanced diversification and risk-adjusted return potential over time.2 These qualities have led sophisticated investors to embrace the strategy. According to the FTSE Russell survey, among asset owners who have been using a single smart beta strategy for two years or more, 20% are using fundamental indexing.

    Using both market cap and fundamentally weighted ETFs is smart investing

    Schwab Intelligent Portfolios includes allocations to both fundamentally weighted ETFs along with traditional market cap-weighted ETFs because these two types of index strategies can work together in your portfolio, adding diversification and return potential while also keeping overall costs low. Schwab has a long history of making investments more accessible and lowering costs for investors. With Schwab Intelligent Portfolios, investors now have efficient access through an automated investment advisory service to broadly diversified portfolios that include innovative strategies such as fundamental indexing.

    David Koenig CFA®, FRM®, Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios®

    1. "Smart beta: 2018 global survey findings from asset owners," FTSE Russell, May 2018.

    2. West, John, "Flying High: RAFI at 10 Years," Research Affiliates, March 2015.

    The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

    Investing involves risk including loss of principal. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

    Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.


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