Exchange-traded funds (ETFs) that invest based on factor strategies have become very popular in Europe over the last three years. Investing with a factor strategy means these funds do not follow a market capitalization-weighted index. Since “factor-based strategy” is a technical term that sounds rather complex, marketing departments and media companies have named these products “smart beta ETFs,” since the factors and strategies used generate better risk-adjusted returns over time than do market capitalization-weighted indices. The main factors used in these strategies are: Low volatility/minimum variance Momentum Size Quality Value These factors have either a regional or global investment focus.

Looking on the headlines in the European ETF industry, it sems to be, that the so-called smart-beta investing is a hot topic. But what is meant by smart-beta investing? The term smart beta has been created to describe indices which are employing market factors like valuations (fundamental data), company size, volatility or momentum, to select the constituents of the respective index. It has been shown by academic research, that these factors can be used to achieve premiums compared to the overall market returns, i.e. these indices claim to improve the returns, compared to capitalization-weighted indices, by using systematic tilts toward