Russell 1000 Value: A Smart-Beta Bet

08/28/2017 2:56 am EST

Focus: ETFS

Jim Woods

Editor, Successful Investing and Intelligence Report

The iShares Russell 1000 Value ETF (IWD), at over $36 billion in assets under management, ranks as the biggest smart-beta fund and as one of the most popular currently on the market, notes fund expert Jim Woods, editor of Successful ETF Investing.


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Going by many different names (strategic beta, fundamental indexing, factor investing and more), smart beta is a catchall term for rules-based strategies that aim to deliver better risk-adjusted returns than traditional market-cap-weighted indexes.

Today, there are hundreds of ETFs and, if you count institutional assets, hundreds of billions of dollars benchmarked against smart-beta indexes. One advantage to owning smart-beta-oriented exchange-traded funds (ETFs) is precision risk management.

Investors looking for a perfect balance between risk and return can make a single purchase of a smart-beta ETF and have access to a select portfolio spread across multiple sectors and companies.

This scenario can work a lot better than traditional stock picking, where investors looking for a good risk-return combination would have to sift through thousands of stocks and multiple different sectors to find the ideal combination. At the very least, such an undertaking is a difficult juggling act.

Investors also may be attracted to smart-beta ETFs for their lower-cost fees. While a mutual fund can charge 0.5-1.0% in management fees, smart-beta funds tend to have expense ratios south of 0.50%, with some even as low as 0.08%.

As an iShares fund, IWD has a higher cost of 0.2% than some similar funds, such as the Vanguard Value ETF (VTV) with its 0.06% fees. But IWD still is very modest in the broader scope of expense ratios for ETFs.

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IWD offers exposure to a range of large- and mid-cap U.S. companies that are considered to be undervalued by the wider market. Year to date, the fund has underperformed the S&P 500, only generating a 4-5% return.

Yet this is largely because the market is currently favoring growth stocks, which lean toward the technology and health care sectors, among others.

By contrast, value investing favors currently beaten-down sectors such as energy and financials. However, a lot of analysts believe that the market’s preference for growth could be coming to an end soon.

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