(Bloomberg) — Goldman Sachs’s first exchange-traded fund is also the latest attempt to kill the term smart beta.
One of the most controversial marketing buzzphrasesever created in finance, smart beta has become an annoying pest that wont go away. Few can define it, and even fewer like it. Many harbor pure hatred for it. William Sharpe has said it makes him definitionally sick. And dont even ask John Bogle what he thinks of it.
Smart beta is a viral term used to describe anyETFthat purposely deviates from market return by tilting the portfolio toward a factor or strategy that has a proven historical record of outperforming, such as dividends, value, low volatility, momentum, or a combination thereof. These are ETFs that live in the space between actively managed funds and passive ones that just attempt to replicate broad market returns.
The origin of the term can be traced to Towers Watson, a leading consulting firm.
Towers Watsons Thinking Ahead Group started talking in detail about the area inthe early 2000s; what they called smart beta subsequently evolved into the monster we know today. The consultancy viewedsmart beta as trying to identify good investment ideas that can be structured better. Smart-beta strategies should be simple, low-cost, transparent and systematic.
Some 15 years later, with over 400 such ETFs holding more than $420 billion in assets, the name remains controversial. Many take issue with the “smart” half of the phrasebecauseone could argue that it implies that market returns and market-cap- weighted ETFs are somehow dumb.
Now Goldman has offered up ActiveBeta to the mix. The Goldman Sachs ActiveBeta U.S. Large Cap EquityETF(GSLC) tracks a Goldman index that weights equities based on value, earnings, volatility, and momentum. Admittedly, ActiveBeta is a pretty accurate, inoffensive term, but so are many of the other terms that have croppedup over the years. We can easily think ofa dozen: * Strategic Beta
* Advanced Beta
* Enhanced Indexes
* Factor Investing
* Scientific Beta
* Alternative Beta
* Quantamental Indexes
* Anti-Benchmark
* Quasi-Active
* Alternative-weighted
* Anti- Beta
* ActiveBeta
Is Goldman helping or hurting the cause?
No one can argue with the bank’s intentions. Still, given that these ETFs are aimed at retail investors, the new monicker mightconfuse them. Manyoutside of the financial industry already think the investing world is flush withpointless jargon, and12terms instead of one may just add to the confusion already surrounding the products.
There is nothing ‘smart’ about that.
