The “best of both worlds” fund strategy

Index funds are cheap, but do not discriminate between good and bad stocks. Actively managed equity funds aim to deliver alpha through stock selection, but have been struggling to do so at least in the large caps space, thus bringing into question the need to pay fees associated with these funds.

That’s where smart beta funds come in. Smart beta funds are designed to select stocks based on a pre-defined strategy – a strategy that ideally has demonstrated a good track record of delivering long term alpha. With the strategy now codified into an algorithm, it loosely resembles an index stock in terms of ongoing management, yet retains the ability to deliver an extra return over beta – ie over market returns. Hence the terminology smart beta.

SBI MF has launched an interesting smart beta fund – the SBI ETF Quality – which plays into the most popular theme that has enabled fund managers to deliver alpha in the last 5 years: the hunt for quality stocks.

The fund defines quality on three quantifiable parameters, basis which a selection of 30 stocks are made from the Nifty 200. This portfolio is then reviewed semi annually. The ETF structure makes it highly cost efficient, and back testing suggests that the strategy retains strong potential to deliver better than market returns over long periods of time – a “best of both worlds” phenomenon, which is the essence of smart beta products.

Click here to download full presentation of SBI ETF Quality

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