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Effective URL: https://rpc.cfainstitute.org/en/research/reports/2024/smart-beta-direct-indexing-and-index-based-investment-strategies
Submission: On November 14 via api from AE — Scanned from US
Effective URL: https://rpc.cfainstitute.org/en/research/reports/2024/smart-beta-direct-indexing-and-index-based-investment-strategies
Submission: On November 14 via api from AE — Scanned from US
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1. Research and Policy Center
2. Research
3. Smart Beta, Direct Indexing, and. . .
THEME: INDUSTRY FUTURE
30 July 2024 Article
SMART BETA, DIRECT INDEXING, AND INDEX-BASED INVESTMENT STRATEGIES
A FRAMEWORK
1. Jordan Doyle
2. Genevieve Hayman
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Innovations such as smart beta exchange-traded funds (ETFs) and direct indexing
go beyond traditional capitalization-weighted strategies and incorporate varying
levels of active management. Our report offers an updated framework for active
management to capture the full range of index-based strategies and to support
informed investment decision making.
Smart Beta, Direct Indexing, and Index-Based Investment Strategies: A Framework
View PDF Jordan Doyle and Genevieve Hayman: The Rise of Index-Based Strategies
Listen to Podcast
REPORT OVERVIEW
Over the last half-century, index investing has revolutionized the financial
industry. Initially focused on tracking market-capitalization-weighted
benchmarks, recent technological advancements and increased demands for
customization have spurred the development of innovative index-based products
such as smart beta ETFs and direct indexing. This evolution has, however, also
brought confusion around what constitutes index investing.
Investing has traditionally been divided into “active” and “passive” management
strategies. For many years, index investing involved replicating
market-capitalization-weighted benchmarks without actively selecting investments
or deviating from market-cap weights (historically called “passive management”).
In contrast, newer index-based strategies such as smart beta ETFs and direct
indexing introduce active decision making in portfolio construction, challenging
traditional distinctions.
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future opportunities.
To address this complexity, our report “Smart Beta, Direct Indexing, and
Index-Based Investment Strategies: A Framework” proposes a new approach for
understanding index-based strategies. This framework categorizes index
strategies by the degree of active management they incorporate beyond
traditional market-cap weighting. By doing so, it provides clarity on how these
products fit into an updated spectrum of active management solutions.
In the next 5–10 years, increasingly diverging worlds—in which deglobalization,
geopolitical conflict, inequality, demographic disruptions, and technological
innovation contribute to increasingly distinct and divided perspectives as
targeted content and personalization create alternate realities—and digital
transformation are both expected to significantly shape the investment industry,
according to a 2023 CFA Institute report, “The Future State of the Investment
Industry.” These factors are generating demand for personalized investment
products such as direct indexing, which allows maximal customization of
portfolios. Simultaneously, smart beta and other ETFs with alternative weighting
methodologies are gaining popularity for their rules-based approaches and
ability to provide efficient exposures to different factors and investment
themes.
Our report emphasizes the importance of establishing a clear indexing framework
and enhancing transparency in the investment industry. By doing so, it aims to
foster a deeper understanding of index investing among investors, firms, and
policymakers, thereby supporting informed investment decision making.
For investment professionals, understanding these products is crucial in order
to successfully meet investor preference. Policymakers also face challenges in
establishing effective regulations, necessitating clear guidelines on disclosure
and terminology to aid investors in evaluating and comparing different
index-based offerings.
The report offers recommendations for investment firms and policymakers to
enhance transparency, clarity, and investor understanding in index-based
investments.
CFA Members Earn 1.25PL
Record PL credit Manage your Professional Learning credits
Publisher Information
CFA Institute doi.org/10.56227/24.1.16
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