Understanding smart beta sources of return

Sara Shores explores where smart beta may make sense in a portfolio by looking at various sources of portfolio return and how this strategy can be used to complement index and active strategies.

If you’re familiar with smart beta basics but are curious to learn more about how this particular strategy fits into a portfolio, let’s take a look at return. We like to think of return of any portfolio as the result of the investments held within it. Many investors look at the total return of an investment fund compared to its benchmark. This helps us to figure out if the manager is doing well or subpar compared to the relevant opportunity set. If the fund is performing above benchmark, we call that return “active”—it’s the value added beyond broad market exposure by the fund’s investment manager. A portion of that “active” return can be attributed to the fund’s exposure to style factors, like value or momentum. For more on this, we asked an expert: Ronald Kahn, BlackRock’s Global Head of Scientific Equity Research, explains the various sources of smart beta return.

Now that we have the source of smart beta return covered, let’s move on to how smart beta can be used to complement index and active strategies.

What are your questions about smart beta, sources of return and blending different strategies? Ask them here.

Sara Shores is Global Head of Smart Beta for BlackRock.

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. Past performance does not guarantee future results.©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.