Are smart-beta funds suitable in current times of volatility?

For an investor who gets swayed by sharp market movements and tends to worry about their investments, for such an investor, one of the better ways of exposure to equities is through a smart beta fund which is based on the low volatility factor.

Chintan Haria, Head of Product Development and Strategy, ICICI Prudential AMC, says, “The offering follows the principle of investing in stocks of companies that have historically depicted low levels of volatility (i.e. stocks which have shown price stability).” 

One such fund in this category is the ICICI Prudential Nifty Low Vol 30 ETF, an offering based on the Nifty 100 Low Vol 30 Index.

Why should investors look at Smart-beta funds?

For an investor looking to invest based on low volatility or alpha or any other such parameters, Haria says, “the smart beta fund provides an optimal investment solution.”

How is it different from other index funds?

Index Funds are managed by replicating/tracking a stock market index. Haria explains, “Most of the indices available are based on market capitalisation. However, a smart beta index follows a rule-based approach as a means to provide better risk-adjusted returns. Here, a fund manager follows an index based on certain sacrosanct rules, while making investment decisions, thereby the philosophy of investment remains passive, but the style of investment becomes rule-based, hence, active. 

Hence, smart beta combines passive and active fund management strategies.

What type of investor should look at it? 

From an investor’s perspective, experts say smart-beta funds can be considered by any investor looking to make an equity allocation in their portfolio. This is because “smart-beta funds combine the benefits of both passive and active investment strategies while being a relatively low-cost way to get some exposure to quasi actively managed funds,” adds Haria. 

Smart-beta funds – Their style of investment

Smart Beta indices select stocks based on one or more factors like volatility, momentum, value, dividend yield, quality, etc. According to Haria, this means that from within the investable universe, these strategies give more importance to certain factors, and the stocks that have those factors generally tend to have a higher weight in the portfolio. 

For example, Haria explains, “a smart beta strategy focused on low volatility will overweigh stocks that have lower volatility compared to the other stocks in the universe. This way, smart beta strategies seek to enhance returns while passively replicating indices which have been formed based on certain factors.”