Recently, I spoke to Silvia Ascarelli at the Wall Street Journal about my understandable skepticism of the new trend of mutual funds coined “smart beta.”
To explain the thought behind these funds, “beta” refers to a market index, and “smart” alludes to the notion that this particular fund may out-perform that market index. Not only do smart beta funds attempt to beat the stock market (a practically proven near impossibility), but they are also not risk-adjusted, i.e., if smart beta funds are to offer higher returns, that means they come with a marked increase in risk. Additionally, fund managers are using these new funds as justification for higher fees, another classic case of higher cost for lower quality.
As I explained in my book A Random Walk Down Wall Street, trying to beat the stock market is akin to a blindfolded monkey throwing darts at a dartboard. Even if you repurpose the concept of market timing with a new term such as “smart beta funds,” you’ll often end up a loser in the long run.
Read more about my take on smart beta funds in this article courtesy of the Wall Street Journal.