The BetaShares ASX 200 'Smart Beta' fund delivered a spectacular 25.5% return in 2013. The fund beat the average active fund managers' return by more than 2%, and the return of the ordinary ASX 200 index by over 5%.
This follows the fund's track record of beating the ASX 200 in 15 of the last 20 years, which when compounding is taking into consideration, will benefit investors hugely over the long term.
But what's it all about?
'Smart Beta' funds (or strategies) work by holding a set selection of stocks, for example the ASX 200, but changing the portfolio weightings of each to reflect better valued or better performing companies. For example, the BetaShares FTSE RAFI Australia 200 ETF (ASX: QOZ) holds companies in the ASX 200, but instead of allocating position sizes based on the market capitalisation of each company, it selects weightings based on four fundamental measures. These are cash dividends, sales, cash flow and book value.
Why does it deliver better returns?
The theory behind 'Smart Beta' funds is that exposure to poorer quality companies, with negative cashflow, small dividends, or dropping sales, is limited, while larger positions are taken in companies displaying good fundamentals. An example of this might be that a Smart Beta fund would hold a comparatively small holding of Qantas Airways Limited (ASX: QAN), but a larger holding of Woolworths Limited (ASX: WOW). Woolworths' impressive dividend, free cash flow and growing sales make it a higher quality company for Smart Beta purposes. Similarly impressive companies include BHP Billiton Limited (ASX: BHP), National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS), Twenty-First Century Fox Inc (ASX: FOX) and Suncorp Group Ltd (ASX: SUN).
How can you get access to Smart Beta funds?
Very simply actually! There are a number of Smart Beta funds available as ASX-listed Exchange Traded Funds (ETFs), which can be bought through any standard broker. Some of the best are operated by BetaShares, and include versions for higher yielding companies, the top 20, 50 and 100 stocks, as well as financial and resource stocks.
Foolish takeaway
I think that the biggest takeaway from the impressive performance of BetaShares ETFs is that reducing exposure to companies with falling earnings and negative cashflow will deliver better returns over the long run. While this may seem immediately obvious to many, sticking to this rule can be difficult in the long run, and investors concerned about adhering to such a philosophy should consider investing in an ETF to look after it for them. Alternatively, Motley Fool Share Advisor stocks are exactly the type that would fit into a BetaShares portfolio.
