In the exchange traded fund (ETF) industry, alternative or smart-beta ETFs have experienced a rapid ascent as investors capitalize on actively managed styles in a passive index-based fund wrapper.
Smart-beta believer Tom Dorsey sold his firm to Nasdaq for $225 million. “Once a quarter, we press a button,’’ Dorsey says. The Focus 5 algorithm then generates a list of investments, and First Trust Portfolios, his partner company, executes them. Otherwise, they don’t meddle with the robot. “We just need someone to press the button.’’ That, for Dorsey, is the essence of smart beta, or strategic beta, or scientific beta, or factor-based investing, or fundamental indexing, depending on which Ph.D. is talking. (Many smart-beta funds are designed by finance geeks.) It’s index investing with key twists, all of them rules-based, with no active management required. Most smart-beta funds track custom indexes. Some are simple variants of the Standard & Poor’s 500 Index and do what they say on the box.
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