Smart beta funds are a variant of passively managed funds that invest in companies forming indices based on specific factors such as value, momentum, low volatility, size, etc.
Hence, smart beta is a general term for a multitude of investment strategies, which tend to have the following in common:
They use mechanical index construction rules that differ from traditional market capitalization based indices
They attempt to capture systematic factors or market inefficiencies in a straightforward and transparent manner which involve no human judgement or subjectivity once they have been put in place.
Smart beta funds are a simple and transparent form of factor investing, which is generally available to investors at low cost.
Globally, smart beta funds has become extremely popular, both as an alternative to passive market-weighted indexing and traditional active investing. According to research by Morningstar, there were 632 smart beta ETFs globally with ~USD 870 billion in assets by the end of June 2020.
However, in India, smart beta funds are still at a nascent stage and only track a few strategic indices.
On average, most of the strategic indices have outperformed the Nifty in three year rolling returns since 2013. Also, in contrast to common perception, these themes seem to have lower risk as compared to the Nifty (if measured in terms of maximum drawdown, i.e. maximum difference between peak and trough during a specific period), despite lower diversification due to the reduction in number of stocks once factor-based filters are applied.
The latest list of all strategic indices are available on the NSE India Website (Link). A subset of these strategic indices with corresponding smart beta funds available for investment are detailed below.
Nifty 50 Value 20 Index: This index takes the 20 most 'value-oriented' companies in the Nifty, selected on the basis of price-to-earnings, price-to-book and other value factors. Index Factsheet
Nifty 100 Low Volatility 30 Index: The Nifty 100 Low Volatility 30 index tracks the performance of 30 stocks in Nifty 100 with the lowest volatility over the past one year. Index Factsheet
Nifty 100 Quality 30 Index: This index consists of the top 30 companies from Nifty 100 based on their Quality score, which is determined using return on equity (ROE), financial leverage or debt equity ratio (D/E) and earning (EPS) growth variability during previous 5 years. Index Factsheet
Nifty 100 Equal Weight Index: This index assigns equal weights to all Nifty stocks rather than weights based on market capitalization. Index Factsheet
Nifty 200 Momentum 30 Index: This index tracks the top 30 stocks from Nifty 200 based on their Normalized Momentum Score, which is calculated based on their 6-month and 12-month price return and adjusted for daily price return volatility. Index Factsheet
Nifty 50 Shariah Index: This index tracks Nifty 50 companies compliant with requirements of Shariah law and the principles of the Islamic religion (considered to be a type of socially responsible investing). Two key screening criteria include:
Revenues from certain non-permissible business areas such as pork, alcohol, gambling, financials, tobacco, pornography, or trading of gold and silver as cash on a deferred basis should be less than 5% of total revenues.
Ratio of debt to the market value of equity is less than 33%.
Bharat 22 and CPSE Index: These indices were set up to meet the government's disinvestment targets and are either public sector-dominated or have a significant public sector component. While both are passive ETFs, the CPSE ETF has only 10-12 stocks and the Bharat 22 ETF is more diversified with 22 stocks in the portfolio. CPSE Index Factsheet
