Beyond market cap
Most index funds globally are invested in pure passive strategies that track traditional market cap weighted indices.
Market cap weighting is simply the process of building an index based on the size of its constituents. However, while this approach is favoured by most index funds, it does lead to some well publicised limitations.
Equity indices, for example, are proportionally more concentrated in the stocks, sectors and regions that have performed well in the past, not necessarily those that will perform well in the future, while bond indices are biased towards the most indebted issuers, not necessarily the most solvent.
These inherent biases constitute unrewarded risks that investors may want to control their exposure to, or even eliminate entirely when investing in less liquid or less efficient markets.
An alternative, risk-aware approach to passive investing is provided by smart (or strategic) beta funds. These funds track indices that use criteria other than company or issuer size to determine portfolio holdings.
Some indices weigh constituents or issuers equally, while some screen for securities with specific characteristics—such as low valuations, liquidity, strong earnings or price momentum, or credit quality. And some do both.
The aim is to provide investors with cost-effective, passive exposure to the return potential of specific markets and asset classes, while reducing the risks inherent in market cap weighted indices and focusing on the objectives of the end investor.
There are now many innovative ways to access markets using a strategic beta approach. When it comes to passive investing, market-cap weighted should no longer be the automatic choice.
Next Generation ETFs: Redefining the Index
Discover the risks of investing in market-cap weighted ETFs; and find out how a Strategic Beta approach can help to reduce index risks for investors.
(JPMB) JPMorgan ETFs (Ireland) ICAV - USD Emerging Markets Sovereign Bond UCITS ETF
The JPMB fixed income strategy provides exposure to the return and yield potential of emerging market debt, while enhancing liquidity and improving country and credit risk allocations relative to traditional market cap-weighted benchmarks.
(JPGL) JPMorgan ETFs (Ireland) ICAV - Global Equity Multi-Factor UCITS ETF
JPGL tracks the JP Morgan Diversified Factor Global Developed (Region Aware) Equity Index whose methodology is designed to provide a core exposure to the market with a better risk-adjusted return compared to a market cap-weighted index.