By Brian O’Connell
For financial advisors, smart beta ETFs like RSP make a lot of sense for investors, provided fees are kept in check and the smart beta component used intelligently, says Daniel Lugasi, portfolio manager with VL Capital Management. Lugasi says the burgeoning success of smart beta ETFs “shows the power of systematically exploiting persistent market anomalies, value and momentum being the primary factors.” “It’s long been known for example that the common market cap weighting used by many indexes leads to overweight positions in more expensive stocks,” Lugasi says. “Moving to things like equal weighting, which tilts more towards value, tends to outperform as a result.” The catch is that many investors conflate alpha with risk. “It’s likely that while the returns of some of these products outperform benchmarks when markets are rising, they will underperform when they fall,” he says.