BQ Big Decisions: Smart Beta ETFs-Are They The Best Of Two Worlds?
Investors, often having seen fund managers of actively managed mutual fund schemes fail to beat the benchmark, are asking why they shouldn’t have a higher percentage of their funds parked in passive mutual fund schemes.
Passive schemes are either exchange traded funds or index funds that mirror a benchmark. For example, a Nifty ETF would deploy funds into the 50 stocks of the index in proportion to their weight. So, at the start of October, if you were to put Rs 100 in a Nifty ETF, nearly Rs 15 would go into Reliance Industries Ltd.
Those in favour of active fund management say it’s unfair to judge the performance of actively managed funds based on the past two years. The passive investment camp, on the other hand, points to the lower costs involved in investing in these schemes, which leads to long-term benefits.
The increased interest in passive investing has led to the creation of a new category of mutual fund schemes—a blend of passive and active strategies. They are called smart beta ETFs.
These ETFs are comprised of a list of stocks that are selected based on criteria that is determined when they are launched. The criteria is often a factor or a combination of factors like low volatility, value, quality or momentum. For example, a Nifty Smart Beta ETF with a focus on low volatility would comprise of stocks within the 50-stock index that are relatively less volatile than their peers.
On this BQ Big Decisions podcast, BloombergQuint speaks to Chintan Haria, head product development and strategy at ICICI Prudential Asset Management, about the types of smart beta ETFs, and how they compare with active and passive mutual fund schemes.