Beyond Smart Beta

GÖKHAN KULA is managing partner and CIO of MYRA Capital. Formerly he was managing director and Head of Asset Management of the Walser Privatbank Invest S.A., and a board member of several Luxembourg-based investment companies. He is a CFA and FRM Charterholder and a consistent voice in the financial media published in Germany, Austria and Switzerland. MARTIN RAAB is executive director of Derivative Partners, Registered Investment Advisor, and a senior adviser to the board of MYRA Capital. He is the publisher and editor of several investment publications, a public speaker on financial products, and is regularly quoted by POLITICO, Bloomberg Brief and various other media. SEBASTIAN STAHN is Treasury and Investment Manager at Wüstenrot Group. Formerly he worked as senior portfolio manager, fund manager and advisor to institutional clients at MYRA Capital and Walser Privatbank. He is a CFA charterholder and a renowned expert in efficient and rules-based investment strategies.

• Preface viiAcknowledgments ixAbout the Authors xiChapter 1 The Beauty of Simplicity – The Rise of Passive Investments 1Outperformance – A Tough Challenge 1Institutional Investors: A Small Change in Allocations, A Big Step for Passive Investments 2Not All “Big Guys” Love ETFs 3Chapter 2 The History of Indexing and Exchange-Traded Products 6Frequent Pricing Thanks to Copper and Feather 6Journalist Trio Pictures the Market 7Indexation Across the Globe 7Customized Indexing aka Smart Beta 8Exchange-Traded Funds – A Unique All-rounder 15Exchange-Traded Commodities – Heavy Metal Even for Lightweight Investors 46Exchange-Traded Notes – The Underdog 53Chapter 3 Index Evolution 57Benchmark Indices 58Smart Beta Indices (Second Generation of Indexing) 85Next Generation Indices (Third Generation of Indexing) 104Chapter 4 The Good, Bad and Ugly – A Critical Review of Today’s Indexing Approaches 127Synthetic vs. Physical Replication 128Second Generation Indexing Critique – The Bad Ones 129Commodity/Energy/Oil ETP Products 133Volatility ETPs 135Chapter 5 Advantages Unlimited – Portfolio Application Strategies for Superior Index Investing 139Never Underestimate the Importance of Investment Costs 139Smart Beta Deconstruction 144Conclusion 152Mind the Behavioral Gap – Earning More by Avoiding Investing Errors 152The Next Generation of Asset Allocation – Risk Factor Allocation Approach in Portfolio Construction 155The Ultimate Question: Passive or Active? 163Chapter 6 Unchaining Innovation – The Future of Active Investing in Passive Products 166Alternative Investing 166Environmental, Social and Governance (ESG)-Based Investments 180Conclusion 190Customized Indexing 192Glossary 200References 210Index 215