Index knowledge key to advising smart beta: Lonsec

Research group Lonsec has flagged with advisers the importance of understanding how smart beta exchange-traded funds determine their index construction rules in order to maximise client returns.

There can be significant differences in investment outcomes even among investment products that appear to offer something very similar, Lonsec said in a statement.

Differences in how fund managers determine factors like the quality, liquidity and weights of certain stocks can result in funds with very different allocations.

Lonsec referred to the iShares S&P Dividend Opportunities ETF, the SPDR MSCI Australia High Dividend Opportunities ETF and the ETFS S&P/ASX 300 High Yield Plus ETF to illustrate this point.


“Both the ETFS and iShares products have similar exposure to financials and materials, but the ETFS fund has a greater allocation to defensive REITs and utilities, while the iShares fund has diversified more across other sectors. Its top 10 holdings represent only 62 per cent of its total portfolio value, compared to 75 per cent for the ETFS fund,” Lonsec said.

“Meanwhile, the SPDR fund’s top 10 holdings are dominated by financials, with smaller allocations across consumer staples and materials, and no exposure to REITs or utilities.”

What this means, according to Lonsec, is that financial advisers need to do more than simply ‘read the packet’ when selecting investment products.

“Smart beta ETFs, which follow rule-based strategies to provide factor exposure, are increasingly recommended by financial advisers because they provide a relatively cheap and effective way of meeting specific investment objectives or creating greater diversification,” Lonsec said.

“Financial advisers should have a thorough understanding of how individual smart beta products operate to ensure they deliver outcomes in line with their clients’ investment objectives.”

Index knowledge key to advising smart beta: Lonsec
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Adrian Flores

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].

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