Is all this talk about “smart beta” — or factor weighting — just a game of semantics, or is there a real benefit to moving beyond simple market tracking beta? Advisor Rick Ferri writes that smart beta or adding on additional factors only increases risk and costs. Ferri suggests that we should stick to “non-diversifiable market risk,” the definition created by Bill Sharpe, who coined the term “beta.”
Even Eugene Fama and Kenneth French (who are associated with DFA and created the Fama-French Three-Factor Model) agree that adding on additional factors is not a viable alternative — or even smart — suggesting that the risks associated with them should be considered on their own. But firms like Wisdom Tree that take into account dividends and Research Affiliates, which employs a strategy that weighs securities using fundamental factors other than market capitalization, are attracting a lot of attention.
So is smart beta just semantics, or is there a way to beat the market without taking much risk or paying much more? Sounds too good to be true.
