How do smart beta ETFs and quant-based funds compare with plain index-based ETFs and funds? Are they more promising?
- Ashish Jain
I don't think smart beta ETFs and quant-based funds are more promising or less promising than the plain index-based ETFs and funds yet. The whole charm of index funds and ETFs is that they are low cost and are predictable. You know where you are investing. In an actively managed fund, you go by the reputation and track record of the fund manager, that okay he's a brilliant guy and will behave in a particular way, in a specific kind of market, based on the long performance history.
The smart-beta funds and quant funds are designed based on a formula and will behave based on the formula. While the actively managed fund manager will judge the state of the market and the companies to invest in, the smart-beta and quant-based funds will behave in a particular manner in a particular market condition, based on the underlying formula.
Currently, I am not a great believer in the back testing of any model of these funds. So let's see. These are early days for the smart beta and the quant funds. We will have to wait to see the performance of these funds over a full market cycle, from market fall to market rise, to be able to build an opinion. Only then we will know if these funds work or not. But not yet.