Understanding Smart Beta Sources Of Return

Understanding Smart Beta Sources Of Return by Sara Shores, CFA, BlackRock

Sara Shores explores where smart beta may make sense in a portfolio by looking at various sources of portfolio return and how this strategy can be used to complement index and active strategies.

If you’re familiar with smart beta basics but are curious to learn more about how this particular strategy fits into a portfolio, let’s take a look at return. We like to think of return of any portfolio as the result of the investments held within it. Many investors look at the total return of an investment fund compared to its benchmark. This helps us to figure out if the manager is doing well or subpar compared to the relevant opportunity set. If the fund is performing above benchmark, we call that return “active”—it’s the value added beyond broad market exposure by the fund’s investment manager. A portion of that “active” return can be attributed to the fund’s exposure to style factors, like value or momentum. For more on this, we asked an expert: Ronald Kahn, BlackRock’s Global Head of Scientific Equity Research, explains the various sources of smart beta return.

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Now that we have the source of smart beta return covered, let’s move on to how smart beta can be used to complement index and active strategies.

What are your questions about smart beta, sources of return and blending different strategies? Ask them here.

Sara Shores is Global Head of Smart Beta for BlackRock.