Matthew Bartolini is a vice president at State Street Global Advisors and head of SPDR Americas Research. He manages a team responsible for the product research and analysis of SPDR ETFs, and the development of market outlooks, investment themes and portfolio implementation ideas. We recently sat down with Bartolini, who will be speaking at our 2nd Annual Smart Beta Strategies Summit (Oct. 26 – Boston) to gather his thoughts on defining what falls under the smart beta umbrella, factor timing, fixed income and The Beatles.
Financial Advisor magazine: In your opinion, how many smart beta factors are there?
Matthew Bartolini: There are five main, broadly accepted smart beta factors— also known as premia or exposures—that research is shown to have historically outperformed the market-cap benchmark over the long term: Value, Size, Low Volatility, Quality and Momentum.
These five factors have been empirically proven to explain the cross-sectional variance of returns.[1] And the advent of smart beta strategies means investors can harness the potential benefits of these premia in a rules-based, transparent and cost effective manner.
Just as Billy Preston is often referred to as the fifth Beatle, dividend yield is commonly viewed as the sixth smart beta factor. The effect of yield, or carry, is not as well documented, but we believe that smart beta is about more than harnessing premia. It is also about approaching specific objectives, in this case income generation, in a rules-based manner. Therefore, while not necessarily a true “factor,” dividend yield has a place in the smart beta discussion—much like Billy does with the Beatles.
FA: Since 2013, smart beta assets have grown from $200 billion to more than $600 billion. Are we in a bubble? Where do we go from here? Is it more of a marketing gimmick than anything else?
Bartolini: The asset levels quoted are eye catching but are not really 100 percent accurate. The basis for my claim is that three major data providers, Morningstar, FactSet and Bloomberg, each report a different figure for flows, asset levels and the number of ETFs deemed to be “smart beta.” This both complicates analyzing a potential “bubble” and confuses the end investor. If leading data providers cannot agree on how to categorize smart beta, how can we expect investors to understand the category and conduct proper due diligence before implementation?
For instance, one of the providers classifies DIA, the SPDR Dow Jones Industrial Average ETF, as smart beta. I am hard pressed to think that back in 1884 Charles Dow figured he was constructing a smart beta index when he placed 11 stocks in a table in the Customer’s Afternoon Letter publication. That is not smart beta. Sure, DIA is not market-cap weighted, but what premia does the Dow Jones Industrial Average Index seek to capture by employing a price-weighted methodology? None. Rather, the Index was intended to give investors information about stock activity back in a time when the market was noticeably speculative. Dow literally came up with the average by taking the stocks’ closing prices and dividing by 11!!