InvestorQ : What are beta index funds?
Abigail Ghoshal made post

What are beta index funds?

Aastha Awasthi answered.
2 years ago
In the stock analysis process, beta is one of the most popular statistical measures to assess the risk. It is an indicator of the volatility of a stock in the market and used by the analysts to determine the risk profile of a stock. The market has a Beta of 1 and stocks are ranked according to the deviation from the market beta. A stock that has moved more than the market has a beta more than 1. If the stock moved less than the market has a beta less than 1. High beta funds are riskier but provide a high return. 

A smart beta fund index fund is a passive fund that is benchmarked to an index by the fund manager as a very well-constructed fund. In smart beta fund, stocks are selected from different indexes such as Nifty 100, Nifty 50 on the basis of other factors such as PE Ratio, Return on Capital Employed, Dividend Yield and Low Volatility.

Investors choose smart beta index funds for high returns above the average return of the market. In Smart beta index funds, investors can capture various deviations more precisely and effectively while making investment decisions. This helps the investors in better management of their portfolio with their preferences whether it is a cost-reducing strategy or risk elimination. These funds are created more scientifically to capture the most promising stocks. Many of these funds maintain the benefits of traditional index funds, including transparency, diversification, liquidity and low transaction fees.

Compared to traditional funds, smart beta index funds are more costly, risky, and indicate extended periods of underperformance. While investing in traditional index funds has a minimum cost. Smart-beta index funds carry higher expense ratios, portfolio turnover, and high rebalancing costs. Investors who buy into smart beta index funds are simply putting more risk into their portfolios for higher returns. The success of smart beta index funds depends upon how smartly the index has been constructed to capture a forthcoming trend correctly. The concept of high risk and high reward is a fundamental principle of finance in history and remains no different here.