If you are looking for a low-vol, value or momentum portfolio, use this fund screener.
Invest according to a formula that weights stock positions in a certain way. Beat the market, or maybe reduce your risk, or increase your dividend income, or maybe do all three. Sounds great, doesn’t it?
Investors have $870 billion in what Morningstar calls “strategic beta” funds, “beta” being jargon for stock-market risk. These funds, passive index funds for the most part, have positions that veer off the usual market-capitalization weights. Instead, they lean toward stocks with particular attributes or “factors,” like recent price momentum or low volatility.
If you want to join this crowd, get a cost-efficient product. This guide to smart beta zeroes in on 12 low-cost mutual funds and 69 low-cost exchange-traded funds.
The two tables below can be sorted for screening. You can sort, for example, by portfolio average market cap, which would be useful if you want a small-company fund. You can sort by expense ratio or portfolio objective or fund size. The tickers link to Morningstar pages with considerably more detail.
Following the tables is a discussion of what a factor fund is supposed to accomplish. Study it before you make a decision. Note: High-income stock funds are covered in a separate report: Guide to Dividend Funds For Retirees: 36 Best Buys.
Source: Morningstar Direct
If you are sure you want to own an index fund with special portfolio weights, these tables will steer you to the best deal. But maybe you aren’t sure. There are two questions to ask: What are you trying to achieve? What makes you think you will achieve it?
One reasonable objective is to increase your income from an equity portfolio by selecting for high dividends. If that’s your smart-beta target, find the best funds here. But understand that buying high-dividend stocks is not the only way to get the desired result; you could instead buy a standard-issue index fund and supplement its dividend with sales of fund shares. In a taxable account latter approach lowers your tax bill.
Here’s another thing you can do with smart-beta funds: own the market in two pieces. Instead of having $100,000 in a stock index fund in a taxable account and another $100,000 of that fund in a retirement account, you could have your taxable money invested in Vanguard Russell 1000 Growth and your retirement money invested in Vanguard Russell 1000 Value. That carve-up would cut your tax bill by putting high-payout stocks under the tax shelter.
Tax ducking, I suspect, explains only a small part of the smart-beta business. It’s likely that most of its customers are trying to beat the market.
No question, certain factors would have beaten the market in years gone by. You could have hypothetically done well, for example, with low volatility (stocks like NextEra Energy
), earnings “quality” (Microsoft
) or momentum (Tesla
To target these factors now, though, requires a suspension of skepticism. You have to convince yourself that a strategy has not acquired its market-beating past by becoming a fad that makes your selected stocks overpriced. You also have to assume, for your smart-beta formula to work, that dumb-beta investors on the other side are happily accepting a market-lagging return. Who are these people?
Vanguard, that paragon of market-cap weighting, got the factor bug in 2018. Its multi-factor fund (VFMF in the table) aims to buy only the best of the best stocks, as measured by quality, value, momentum and low volatility. The fund is off to a bad start, lagging the market by 11 percentage points annually.