Beyond Smart Beta Index Investment Strategies for Active Portfolio Management

Beyond Smart Beta is the investor's complete guide to index investing, with deep analysis, expert clarification and smart strategies for active portfolio management. From the general to the obscure, this book digs into every aspect of Exchange Traded Funds (ETFs) including ETCs and ETNs to break down the jargon and provide accessible guidance on utilising the indices as part of a more productive investment strategy. Succinct explanations of terms and concepts help you better grasp ETP anatomy, mechanics and practices, while examples, charts and graphs provide quick visual reference for total understanding. The expert author team examines the risks and benefits associated with various indexing approaches, sharing critical review of next-generation methods to help you make well-informed investment decisions.

ETFs provide a solid foundation within mature and well-researched markets, allowing investors to focus on areas where active management has the potential to reap higher returns. This book shows you how to take full advantage of the growth of this market to strengthen your portfolio for the long term.

• Assess the current landscape and the anatomy of ETFs/ETPs
• Understand ETP handling, costs, trading, and investment
• Evaluate the pros and cons of next-generation indexing approaches
• Avoid risk while incorporating indices into an active portfolio management strategy

Index concepts have evolved from basic, passive investments through Smart Beta, and are evolving into a third generation of products that will quickly become an important element of investor portfolios. Key benefits have propelled ETFs to surpass hedge funds in global capital, and the growth shows no sign of slowing. Beyond Smart Beta provides a primer for investors seeking to understand — and take advantage of — these lucrative new products.

GÖKHAN KULA is managing partner and CIO of MYRA Capital. Formerly he was managing director and Head of Asset Management of the Walser Privatbank Invest S.A., and a board member of several Luxembourg-based investment companies. He is a CFA and FRM Charterholder and a consistent voice in the financial media published in Germany, Austria and Switzerland.

MARTIN RAAB is executive director of Derivative Partners, Registered Investment Advisor, and a senior adviser to the board of MYRA Capital. He is the publisher and editor of several investment publications, a public speaker on financial products, and is regularly quoted by POLITICO, Bloomberg Brief and various other media.

SEBASTIAN STAHN is Treasury and Investment Manager at Wüstenrot Group. Formerly he worked as senior portfolio manager, fund manager and advisor to institutional clients at MYRA Capital and Walser Privatbank. He is a CFA charterholder and a renowned expert in efficient and rules-based investment strategies.

Preface vii

Acknowledgments ix

About the Authors xi

CHAPTER 1 The Beauty of Simplicity – The Rise of Passive Investments 1

Outperformance – A Tough Challenge 1

Institutional Investors: A Small Change in Allocations, A Big Step for Passive Investments 2

Not All “Big Guys” Love ETFs 3

CHAPTER 2 The History of Indexing and Exchange-Traded Products 6

Frequent Pricing Thanks to Copper and Feather 6

Journalist Trio Pictures the Market 7

Indexation Across the Globe 7

Customized Indexing aka Smart Beta 8

Exchange-Traded Funds – A Unique All-rounder 15

Exchange-Traded Commodities – Heavy Metal Even for Lightweight Investors 46

Exchange-Traded Notes – The Underdog 53

CHAPTER 3 Index Evolution 57

Benchmark Indices 58

Smart Beta Indices (Second Generation of Indexing) 85

Next Generation Indices (Third Generation of Indexing) 104

CHAPTER 4 The Good, Bad and Ugly – A Critical Review of Today’s Indexing Approaches 127

Synthetic vs. Physical Replication 128

Second Generation Indexing Critique – The Bad Ones 129

Commodity/Energy/Oil ETP Products 133

Volatility ETPs 135

CHAPTER 5 Advantages Unlimited – Portfolio Application Strategies for Superior Index Investing 139

Never Underestimate the Importance of Investment Costs 139

Smart Beta Deconstruction 144

Conclusion 152

Mind the Behavioral Gap – Earning More by Avoiding Investing Errors 152

The Next Generation of Asset Allocation – Risk Factor Allocation Approach in Portfolio Construction 155

The Ultimate Question: Passive or Active? 163

CHAPTER 6 Unchaining Innovation – The Future of Active Investing in Passive Products 166

Alternative Investing 166

Environmental, Social and Governance (ESG)-Based Investments 180

Conclusion 190

Customized Indexing 192

Glossary 200

References 210

Index 215

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