Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 178

Five types of smart beta ETFs on the ASX

Do you prefer regular or smart investing? Smart, of course, which is why fund marketers invent catchy names for investment products. ‘Smart beta’ is one such product category.

Smart beta ETFs are not new. Globally, there were 1,123 smart beta ETFs as at 30 June 2016. In Australia, there are 154 ETFs and 21 are known as smart beta, accounting for about $1.4 billion or 8.4% of the market, up 20% from a year earlier.


Source: Morningstar, Owners Advisory, September 2016

What are smart beta ETFs?

Smart beta is a name given to investment strategies that aim to either enhance returns or reduce risks of the existing traditional market-capitalisation-weighted indices – the most referenced one in Australia is the S&P/ASX 200. One of the simplest examples of a smart beta version of the ASX 200 is the equal-weighted version. As the name suggests, this strategy invests 1/200th in each stock on the index. Smart beta strategies differ from active strategies in that:

  • they are rules based
  • they are transparent (we know what the rules are)
  • they are typically low cost when compared with actively managed funds.

Most of these strategies aim to exploit a weakness in a market-cap index and fundamental to their investment philosophy is ‘just because a company is big doesn’t mean you should own a lot of it’. It is common to see so-called ‘factor’ ETFs – smart beta ETFs that increase the weight of smaller companies relative to larger companies or value, momentum, quality or any of the other common factors that are known to perform over time.

Main types of smart beta ETFs

There are five main types of smart beta ETFs currently available in the Australian market, with more types expected to follow:

  • Dividend screened – as the name suggests, this one seeks higher-income stocks and is currently the most popular of the smart beta ETFs available. This trend is occurring globally as yields on fixed income products fail to meet investors’ income demands.
  • Fundamental – this one typically weights or positions each stock based on company fundamentals derived from balance sheets/cashflow statements and profit/loss statements.
  • Quality – weights are determined according to the quality of each stock’s earnings.
  • Equal weighted – the name says it all.
  • Minimum variance or volatility – these are designed to exhibit lower price variability than the market capitalisation index.

Dividend seeking investment strategies are extremely popular globally


Source: Morningstar, Owners Advisory, September 2016

Fees for the smart beta products are usually cheaper than active management but dearer than the traditional market-capitalisation indexes, as shown below.


Source: Morningstar, Owners Advisory, September 2016

The relative performance of smart beta-style ETFs that are rules-based investment strategies are often tied to the investment cycle. For example, those based on value or fundamental factors can underperform the market-capitalisation-weighted index for a period of time – such is the nature of value investing. Likewise, those screening for dividends also will have periods where they will underperform the market. The chart below shows periods where smart beta strategies can overshoot to the downside as well as the upside.


Source: Factset, Owners Advisory, September 2016

Rules-based funds, such as smart beta funds offered on the ASX, straddle the spectrum between active and passive investment management. Like active funds there is the possibility of outperformance, but also underperformance when the ‘rules’ are not favoured by prevailing market conditions. However, compared to their passively managed peers, net of fees beating the market is still possible. Smart beta strategies offer access to a form of active management without the need to filter through the vast array of mixed-performing stock pickers.

 

Leah Kelly is a Portfolio Manager at Owners Advisory. This article is general information and does not consider the circumstances of any individual.

 

RELATED ARTICLES

It pays to look under the hood of ETFs

What is smart beta and why is it growing in popularity?

Why gold may keep rising - and what could stop it

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.