Smart Beta ETFs Are Backed by Years of Experience

Money managers who have years of experience in traditional active management are also finding success in bringing their methodology over to the ETF business through smart beta strategies.

“We are focused on consistency, we have half a trillion in asset management, and we have more four- and five-star funds than most of our competitors. The key to that, though, is consistency, and that is what has played into our strategic beta solutions,” Marc Zeitoun, Head of Strategic Beta and Head of Private Client Advisory, Columbia Threadneedle, said at Inside ETFs.

For example, the Columbia Multi-Sector Municipal Income ETF (MUST) is one way for investors to broaden their opportunity set and gain exposure to a more effective tool to implement a passive muni solution.

MUST could help complement a traditional approach to municipal bond investing and improve investor outcomes. The smart beta methodology leans toward potential opportunity as opposed to traditional market cap-weighting or indebtedness. As a result, the portfolio takes a more active approach to enhance yield and generate improved risk-adjusted returns over conventional municipal benchmarks while following a passive, rules-based indexing methodology.

Specifically, the underlying portfolio includes a 25% tilt toward shorter, high quality muni debt securities, which provides stability and buoys lower-rated, higher yielding bonds; 45% toward all-weather core positions, which balance duration and credit risk by targeting lower-rated investment grade and intermediate-term revenue bonds; and 30% in longer, low quality debt, which pursues a higher level of income via credit risk in an attempt to mitigate interest rate sensitivity.

Furthermore, the smart beta strategy excludes pre-refunded bonds due to their lower yield potential, California bonds due to high in-state demand leading to lower yields and relatively higher premiums, and U.S. territories and Tobacco to dampen volatility.