Is smart beta too concentrated?

SMART BETA

Paul Bouchey, managing director of research at Parametric Portfolio Associates, analyses how beta strategies promising diversified stocks could, in reality, be too concentrated on just a few.

There are risks you can quantify, and then there are risks which are unknown. Investors who bring a certain amount of humility to their process will tend to prosper over those who assume they know everything. For example, besides just looking at common measures of risk – like volatility, value at risk, and expected tail loss – investors should also pay close attention to how concentrated their investments are. This is particularly true for some of the ‘advanced beta’ indexes, which claim to be diversified portfolios when, in fact, they are concentrated in just a few stocks. The eff...