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Why you should consider a flexible smart beta ETF

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Why should I consider a smart beta ETF? What are the advantages? Anshula Venkataraman, analyst manager research, Morningstar

Investors looking for exposure that is neither purely active or passive (market cap) can use a strategic beta product as an investment solution.

A good strategic beta, or smart beta, exchange traded fund (ETF) should be low cost; while slightly more expensive than their market-cap counterparts, strategic beta ETFs are typically much cheaper than actively managed funds.

Strategic beta products typically have low turnover, which in turn makes these ETFs relatively more tax-efficient compared with their actively managed peers.

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As a function of the vehicle structure, ETFs typically also have the advantage of greater liquidity and transparency compared with actively managed funds.

Finally, strategic beta products can be used to achieve specific investment objectives such as dividend yield or income, providing investors with greater flexibility to construct their portfolios.

What types of strategies are available? Michael Elsworth, general manager alternatives and specialised research, Lonsec

Smart beta is a term that is applied to investment strategies that are designed to capture return premiums or factors such as size, value, volatility, momentum and quality.

As an example, a typical "quality" smart beta fund could select and weight companies according to metrics such as return on equity - a high ROE potentially indicates high profitability; earnings variability - low variability generally indicates that a company can generate steady and reliable earnings; and debt to equity ratio - low levels of debt reduce the risk profile of a company.

Smart beta portfolios offer investors an opportunity to invest in the underlying drivers of return at a fraction of what comparable active investment strategies cost.

See the October issue of Money for top 10 most-asked questions on ETFs.

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