Dumb Beta


Smart beta from Global Beta Advisors

Pennsylvania-based Global Beta Advisors is listing two new smart beta ETFs. 

  • Global Beta Low Beta ETF (GBLO) 
  • Global Beta Momentum-Growth ETF (GBGR)

GBLO tracks an index of companies in the S&P 500 whose share prices move up and down the least, or have low volatility. Companies are then weighted by revenue, with those that make the most revenue getting a bigger share of the index. Companies weights are capped at 5%. 

GMGR will also pick 100-odd companies from the S&P 500. Its picks will be based on revenue growth rate. Companies will be capped at 10%. 

The funds rebalance quarterly. Fees were not included in the prospectus. 

Analysis – GBGR doesn’t take competitive markets seriously

The investment strategy used by GBGR is interesting, as revenue growth seems to be the main trade technology stock buyers are making these days. 

Tech traders prefer to look at revenue instead of profits, because profits are voluntarily suppressed by many technology companies like Amazon as it helps make it harder for their competitors to catch them. Suppressing profits helps achieve this because it frees their arms to spend more on research and development. Or simply to offer their products at lower prices. 

Meanwhile, tech traders like growth as opposed to dividends because interest rates are so low. When interest rates are low, the value of a companies estimated cash flows in 20-years time become worth a lot more. On the surface at least it seems like GBGR is using a common investment strategy. 

Yet there is an obvious problem here. As using an index ETF for this type of strategy doesn’t take seriously just how competitive the stock market is. Why? 

Whenever companies update their revenue figures, sophisticated traders act very quickly to “price them in”. For example, Netflix share price dropped 10% yesterday within about minutes of announcing its disappointing subscriber growth. What this means for GBGR – which only buys and sells shares once every three months – is that any important information about revenue growth will already be “priced in” by the time it comes to change the shares it holds. 

This, in turn, will mean that GBGR’s performance could, ironically, have little to do with actual revenue growth.