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?

The challenges with building a dividend portfolio

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Latest Updates

Shares

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Superannuation

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Have Apple and Google reached the beginning of the end?

It might be hard to imagine a world where Apple and Google aren’t dominant, but disruption often starts with tiny cracks. AI's emergence into the mainstream might have set the stage for a new generation of leaders.

Superannuation

Did retirees lose out when they accepted defined benefit schemes?

Defined benefit pensions were designed to offer security in retirement. But new tax policies and arbitrary limits now erode their value - especially for Australians who contributed their own savings to these plans.

Property

Why Australia's agricultural land boom has stalled

Farmland prices have flatlined, bringing one of the most dramatic rural property cycles in Australian history to an end. The market for agricultural land now seems to be entering a new and more nuanced phase.

Property

The retail property niche offering income and growth

Neighbourhood shopping centres have fought off one perceived threat after another. What's more, they continue to offer secure income from blue-chip firms and other tenants linked mostly to essential spending.

ASX plans to attract more IPOs don’t go far enough

High-profile Australian stock market listings, like Guzman Y Gomez's IPO in 2024, are rare. ASIC aims to streamline the IPO process to boost listings, but faces barriers like share structures and governance.

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.