Are Smart Beta Funds Worth The Higher Cost?

In this video, I’ll explore whether smart-beta funds are worth their higher cost.

Smart-beta funds have become popular. They try to replicate various investing techniques, such as value and growth, with an automated formula.

Here’s how the funds were explained in a March 18, 2017 Buttonwood column in The Economist:

[Excerpt shown at 0:35.]

While it may be true that smart-beta funds are cheaper than active fund managers, it’s important to remember that active fund managers aren’t worth much. Most of them lose to plain Jane indexes.

So, we have to see whether smart-beta funds are worth their higher cost compared with standard index funds.

We’ll use the Russell 1000 index, which consists of the largest 1,000 companies from the Russell 3000 total US stock market index. It’s like the S&P 500, but with 1000 companies instead.

The index is available in its plain form from iShares with symbol IWB. Its smart-beta growth version uses symbol IWD, and value uses IWF. Here are their expenses:

[Chart shown at 2:51.]

The plain Jane index fund, IWB, charges a net expense ratio of just 0.15%, while value (IWD) and growth (IWF) charge 0.20%. Smart-beta is 33.3% more expensive.

Has it been worth it? Let’s have a look.

[Charts shown at 3:40.]

Sometimes value wins, sometimes growth wins, but you can’t know which in advance, so own the whole index.

Which have investors chosen? Value and growth, of course. AUM: IWB $18B, IWD $36B, IWF $34B.


Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.
  • Here are your three options:

    Option 1: Annual Subscription

    For just $236.97 per year, you’ll receive everything listed above to completely upgrade the way you manage your investments, including a copy of The 3% Signal. This is what I recommend:



    Option 2:Monthly Subscription

    If you'd like to try The Kelly Letter  without paying the full year, you can pay $19.97 per month, but it will not include a copy of The 3% Signal :


    Option 3:Free Email List

    If you'd like to hear more from me but aren't ready to part with any money yet, you're welcome to join my free email list:

    Join the free list






    Thank you for the work you do. You're a household name here and my wife and I often discuss your letters on Sundays. My ten- and seven-year-old children recognize your name and will eventually be taught to invest using 3Sig and 6Sig. You've had an enormously positive impact on our investing and inspired me to look at the world in more rational and clear terms than I did years ago. I'm sure that thousands of others would say the same. Kelly Letter subscriber Matt Barnes
    Matt Barnes
    Product Line Director
    OCLC

    Join Matt and thousands of other rational investors to invest without stress.

    Subscribe to The Kelly Letter  now!

Bestselling Financial Author