Today at InsideETFs one of the best panels of the day was titled “Smart Beta – A Deep Dive”.  The panel was moderated by FactSet and the format emulated the U.S. Presidential Debates, where each panelist was given two minutes to extrapolate their thoughts on Smart Beta (a term universally agreed upon as not so smart) or as Morningstar coined it, “Strategic Beta”.
Moderator – “Each panelist, please give us your summary on the benefits of Smart Beta.”
Winner – Ben Johnson of Morningstar who proposed that the industry “build a wall around the term smart beta and make Research Associates pay for it.”  Zing!
Runners Up – Ted Lucas of Lattice who declared “with data, things can be measured”, and Robert Nestor of Blackrock who similarly proclaimed that “increased availability of the data has changed the game for advancements in multi-factor investing”.
The first question was “What dictates which factors to use and when to use them?”
Winner – Robert Nestor commented that “understanding the strengths and weaknesses of each individual factor backed up by academic research will uncover proper scenarios such as times when value and growth are best used in tandem, with momentum adding to positive returns.”
Question – “We continue to be in an extremely volatile market cycle.  What can Smart Beta do to smooth out returns?”
Winner – James Norman of Legg Mason theorized that “too many people are ignoring global macroeconomics when constructing Smart Beta strategies.  A proper approach needs to consider a wide range of country allocations as well as sector rotation to account for the big picture.”
Question – “How exactly can Smart Beta smooth out risk?”
Winner – Ted Lucas explained that you have to “look for negative correlations between single factors such as value & momentum. The strength of each individual factor needs to be considered as well as negative correlations between certain factors during certain market cycles.”
Question – “How can average investors or advisors measure all these factors?  It seems like the data is exclusive to Issuers.
Winner – Ted Lucas strikes again! “Each factor has widely published data on the web. Of course there are more sophisticated tools which professionals have to pay for.”
Question – “How do you trust the data being used to formulate Smart Beta strategies?”
The Winner – Ted Lucas who mused that “Clean data is essential” and concluded with a mic dropping final thought that folks need to implement a “Backtest Bullshit Barometer” (BBB) which is essentially just using logic to spot exaggerations.
The overall Winner of the Deep Dive panel…..Mr. Theodore Lucas.  Well done sir, well done.

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