A. Ever since the financial crisis of 2008, investors have embraced "smart beta" funds - funds that are neither passive index funds nor actively managed funds, but using other tactics, such as fundamental, high-dividend, low volatility, high-momentum, low-beta, etc. to determine fund investments, and many smart beta funds have generated great returns in the past several years.
Amid stock market turmoils lately, investors are turning to smart beta funds as a refuge. But should you expect the smart beta funds continue to generate stellar returns in the future?
In one of our previous blog posts, we have pointed out one of the reasons smart beta did well, here we will give investors another alert -
A recent academic study has found that many of the smart beta funds had low valuations a few years ago when they started, but now they are dangerously expensive.
For example, funds that invest in low-volatility stocks - the low-volatility stocks used to be half as expensive as the overall stockmarket, but now they are 20% more expensive! If you invest in them now, you are paying a higher price, which could mean less stellar return going forward.
What should you do before investing in a smart beta fund?
Checking its history - if it used to have low PE or low price to book ratios, but not anymore, it's a good indication you are buying high, can you sell higher, that's a question only future can tell.