iQ All Cap Smart Beta Model
INTRODUCTION
Beta is a measure of a stock’s relative price volatility compared to the general stock market. A stock with a beta of 1.0 has the same price volatility as the S&P 500 index. High-beta stocks have betas above 1.0 and move by a larger percentage than the S&P 500 moves, both during S&P up moves and down moves. The rationale given for recommending the purchase of high-beta stocks is that higher returns must be linked to higher volatility (Beta).
However (based on a 40-year Harvard study of stock returns between 1968 and 2008), we've learned that low-volatility and low-beta portfolios offered an enviable combination of high average returns and small drawdowns. This outcome runs counter to the fundamental principle that risk is compensated with higher expected return. Investing in low-beta stocks may be the “the best of both worlds” because you get both a higher return and lower volatility.
The All-Cap Smart Beta Model represents an equal-weighted portfolio of Small, Mid, and Large cap stocks with low 5-year beta and volatility.
PROCESS
The iQ All Cap Smart Beta Model employs the following unemotional, rules-based process:
Start with the largest 1500 domestically-traded companies.
Sort by 5-year beta and keep the lowest 10% (150 companies).
Sort by 12-month share buyback and operating earnings yield and keep the top 30 companies.
Choose the top 10 companies by sorting by 5-Year Seasonal Relative Strength divided by 5-Year Standard Deviation.
This model reconstitutes every February, May, August, and November.
The potential benefits of the iQ All Cap Smart Beta investment strategy..
This investment process is designed to balance stability with high performance by honing in on financially sound companies that also demonstrate low volatility and effective risk management. By prioritizing firms that show a commitment to shareholder value and consistent earnings, the strategy targets companies likely to sustain growth and weather market fluctuations.
Additionally, focusing on those with a proven track record of risk-adjusted returns enhances the potential for steady long-term gains, making this a methodically balanced selection process tailored for both resilience and profitability.
It's important to note that investing in low beta stocks may also have some potential drawbacks, such as the potential for lower returns during market upswings. Additionally, low beta stocks may not be suitable for investors who are looking for high-growth opportunities or who have a high-risk tolerance.