The document discusses the concept of smart beta, defined as investment strategies that focus on better risk-adjusted returns through factor-based exposures, differing from traditional market-cap weighting. It highlights the growing adoption of smart beta ETFs among institutional investors and outlines various strategies and critiques surrounding smart beta, including performance concerns and the volatility of factor returns. Additionally, it presents a multi-factor approach as a way to enhance performance by combining different investment themes.

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Smarter Beta
Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market
Intelligence. Not for distribution to the public. Copyright © 2016 by S&P Global Market Intelligence. All rights reserved.
Ruben Falk
Global Head
Investment Management Segment
S&P Global Market Intelligence
September 2016

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Defining Smart Beta
2
• “Smart beta” can be defined as strategies that differ from the traditional market capitalization-
weighted method in search of better risk-adjusted returns through exposures to desirable
characteristic or factors
• These factor-based strategies are not new to investors
– Quantitative managers have long been using computer-driven algorithms to exploit inefficiencies and investor behavior
biases in the stock market (e.g., value, size, momentum, quality, volatility, etc.)
– However, investors usually gain exposures to these factors through active managers
• Smart-beta approach provides investors with accessible tools to systematically harvest factor-
based premiums at a lower cost. Investors now only need to hire active managers where they have
been shown to provide alpha beyond the static-factor exposures
– “For an average active manager, static exposures to four smart beta factors (market, size, value, and momentum)
explain about 35% of their active risk budget. . . . for about 35% of these managers, smart beta contributes 50% or
more of their active risk.” – Smart Beta: The owner’s manual, Kahn and Lemmon
• According to a report released by Invesco, the smart beta ETF category is poised for the greatest
growth relative to all other ETF categories over the next three years, with more than half (53%) of
institutional decision-makers expecting to increase their use of smart beta ETFs
Source: Market Strategies International Research Report, Invesco PowerShares Capital Management LLC (January 2015) The Evolution of Smart Beta ETFs | Gaining Traction in the Institutional Community.

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Smart Beta amongst Global Asset Owners
3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
AUM > $10BN AUM $1-10BN
Smart Beta Allocations of Global Asset Owners
Have Smart Beta Allocation Currently Evaluating Smart Beta Other
Combined 64% in 2016,
up from 46% in 2015
Source: “Smart beta: 2016 global survey findings from asset owners”, FTSE Russell

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Smart Beta Market
4
A recent research paper by Denys Glushkov shows that dividend, equal-weighted, and
multi-factor-based strategies lead the smart beta (SB) in market share
Source: “How smart are “smart beta” ETFs?” Denys Glushkov, University of Pennsylvania 2015.

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A Simple Smart Beta Example
5
The rationale behind the smart beta idea is illustrated using the simple factor,
earnings-price (E/P) ratio, by building five portfolios using various weighting
schemes and observing the difference in performance
Source: S&P Global Market Intelligence’s Quantamental Research as of 1 Sep. 2016. S&P 1500 index from January 1995 – Sep 2016. Quarterly rebalancing. For the above exhibits, back-tested returns do
not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include payments of any sales charges or fees. Such costs would lower performance. Indices are
unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower
performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Total Return Index
Performance of Earnings Based Weighting Schemes
relative to the S&P 1500 Benchmark
Top E/P Quintile Equal Weight
Top E/P Quintile Cap Weight
Earnings Weighted
Benchmark Equal Weight
Benchmark Cap Weight

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Smart Beta, Dumb Beta
6
• Smart beta strategies have received criticism from both academics and practitioners
– Many do not believe they are “smart” because long-run factor performance is no better than cap-
weighted benchmarks
– They would be better described as ‘factor indices’ or ‘strategic beta’ as they are just a systematic
exposure to style factors
• Fama-French factors have been published for many years
– There are also concerns that “crowding” of these factors causes opportunities to be
arbitraged away
• Evidence also shows factor performance can fluctuate over time, begging the
question of how to create more stable strategies
• Some strategies do not work during certain macro and market regimes
– But factor timing is difficult (e.g. Asness, 2016)

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A Closer Look At Factor Choice
7
• Each style represents an investment theme
– Fama-French started with basic ideas such as price-to-book, but there are many others that can be
used to measure the value of stocks relative to their fundamentals
• E.g., U.S. and other Developed Market investors tend to focus more on cash flows
– As a result, Cash flow-based factors have better-observed returns than earnings based-factors. Using
the free cash flow to price factor, we are able to obtain higher returns relative to earnings-to-price
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 & 9 Sep. 2016. S&P 1500 and BMI EAFE indices from Jan. 1990 – Sep. 2016. Monthly rebalancing. For the above
exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include payments of any sales charges or fees. Such costs
would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities
they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
S&P 1500, Top Quintile, Equal Weight BMI EAFE, Top Quintile, Equal Weight
Cumulative Active Return (%)
Cumulative Active Return (%)

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S&P Capital IQ Alpha Factor Library Style Definition
8
To avoid biases from factor selection, we built eight style indicators to provide a comprehensive view
of style performance. Then we track factor performance based on equal weighted quintile returns.
Source: S&P Global Market Intelligence’s Quantamental Research, as of 1 June 2015.
Quantamental Style Indicators
Valuation Historical Growth
Book to Price
Under-valued companies measured by book
value, sales, earnings, cash flow and
dividend yield
1Y Chg FCF/Assets
Companies that have strong YoY growth in
Earnings, Cash Flow, and Assets
FCF/Price 1Y Chg OCF/Assets
EBITDA/EV 1Y Chg Sales Turnover
E/P 1Y Chg EPS
Div/Price Sustainable Growth
Sales/EV
Earnings Quality Capital Efficiency
Cash Conversion Cycle
Companies with strong management quality
and healthy earnings
Return on Equity
Companies that try to maximize shareholder
value by optimizing capital structure and return
on capital
Net Profit Margin CF ROIC
WC Accruals LT Debt to Equity
Accrual Ratio - CF Capital Acquisition Ratio
Net Income Stability 1Y Chg Shares Out
Price Momentum Analyst Expectation
12M - 1M Price Mom
Companies that are chased by investors for
strong long-term outperformance and short-
term rebounds
Long Term Growth
Companies liked or disliked by analysts that
follow the stock
1M Price Reversal Analyst Diffusion
1M Price High Low SUE
9M Price Momentum Num FY1 EPS Rev
5D Price Reversal
Volatility Size
12M Realized Volatility
Companies that have higher price
fluctuations, generally considered as
technically risky
Companies that are relatively smaller, generally
considered as fundamentally risky
1MVol Log Market Cap
60M CAPM Beta Log TTM Sales
90DCV

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Factor Premium – Valuation
9
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. BMI global index except for U.S. (S&P 500), China (S&P CITIC 300), Australia (S&P/ASX 200), Canada (S&P/TSX), last 10
years, Q1 active cap-weighted, monthly rebalancing. For the above exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include
payments of any sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would
pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
Last 10 Years

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Factor Premium – Growth
10
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. BMI global index except for U.S. (S&P 500), China (S&P CITIC 300), Australia (S&P/ASX 200), Canada (S&P/TSX), last 10
years, Q1 active cap-weighted, monthly rebalancing. For the above exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include
payments of any sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would
pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
Last 10 Years

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Factor Premium – Earnings Quality
11
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. BMI global index except for U.S. (S&P 500), China (S&P CITIC 300), Australia (S&P/ASX 200), Canada (S&P/TSX), last 10
years, Q1 active cap-weighted, monthly rebalancing. For the above exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include
payments of any sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would
pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
Last 10 Years

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Factor Premium – Capital Efficiency
12
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. BMI global index except for U.S. (S&P 500), China (S&P CITIC 300), Australia (S&P/ASX 200), Canada (S&P/TSX), last 10
years, Q1 active cap-weighted, monthly rebalancing. For the above exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include
payments of any sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would
pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
Last 10 Years

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Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. BMI global index except for US(S&P 500), China(S&P CITIC 300), Australia(ASX 200), Canada(TSX), Last 10 Years, Q1 Active
Cap Weighted, Monthly Rebalancing. For the above exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include payments of any
sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the
securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
Factor Premium – Price Momentum
Last 10 Years

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Factor Premium – Low Volatility
14
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. BMI global index except for U.S. (S&P 500), China (S&P CITIC 300), Australia (S&P/ASX 200), Canada (S&P/TSX), last 10
years, Q1 active cap-weighted, monthly rebalancing. For the above exhibits, back-tested returns do not represent actual trading results and were constructed with the benefit of hindsight. Returns do not include
payments of any sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would
pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
Low volatility is more pronounced after financial crisis
Last 5 Years

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Multi-Factor Approach
15
A multi-factor approach typically improves single-factor performance by
allowing strategies that work independently to reduce return volatility
Source: S&P Global Market Intelligence’s Quantamental Research, as of 2 Sep. 2016. S&P 1500 index from Jan. 1995 – Sep. 2016. Quarterly rebalancing. For the above exhibits, back-tested returns do not represent actual trading
results and were constructed with the benefit of hindsight. Returns do not include payments of any sales charges or fees. Such costs would lower performance. Indices are unmanaged, statistical composites and their returns do not
include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Past performance is not a
guarantee of future results.
• Smart Beta is all about positioning
• A few ideas that could resonate
with investors:
– Profitability + Valuation =
Quality at a Reasonable Price
– Valuation + Growth =
Growth at a Reasonable Price
– Momentum + Valuation =
Value with a Catalyst
– Cash Flow + Valuation =
Cash Generation at a Reasonable Price
– Cash Flow + Momentum =
Cash Generation with a Catalyst
0
500
1000
1500
2000
2500
3000
Total Return Index
Performance of Two Factor Combination
relative to the S&P 1500 Benchmark
E/P & ROIC, Top 100, EW
ROIC, Top 100, EW
E/P, Top 100, EW
Benchmark Equal Weight

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Portfolio
Construction
16

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Smart Beta Portfolio Construction Approaches
17
Alpha or
Smart Beta
Signals
Portfolio Construction
Rules Based
Optimization Based
Risk Mitigation/
Neutralization
- Sector/Country
- Factor Loading
- Tracking Error

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Examples Of Rules Based Strategies
18
(S&P 1500, Jan. 1995 – Sep. 2016)
0%
5%
10%
15%
20%
S&P 1500
CW
S&P 1500
EW
Earnings
Weighted
E/P (Top
100) CW
E/P (Top
100) EW
ROIC (Top
100) CW
ROIC (Top
100) EW
E/P & ROIC
(Top 100)
CW
E/P & ROIC
(Top 100)
EW
9.7% 11.9% 10.5% 12.6% 14.5% 13.2% 15.2% 15.0% 16.1%
0.51 0.59 0.57 0.50 0.58 0.69 0.76 0.72 0.74
Source: S&P Global Market Intelligence, ClariFI information 1 Jan. 1995 to 1 Sep. 2016. Quarterly rebalancing. For illustrative purposes only. Note: Past performance is not an indication of future results. Indexes are unmanaged,
statistical composites and it is not possible to invest directly in an index. These results are inherently limited because they do not represent the results of actual trading and were constructed with the benefit of hindsight. The returns
shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower
than the performance shown.
Annualized returns
Sharpe Ratio

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Example Of An Optimization Based Strategy
19
• Objective at each quarterly rebalancing: Maximize portfolio weighted two-
factor model score (E/P and ROIC) subject to the following set of constraints
– Exactly 100 holdings, fully invested
– Maximum 60% annual one-way turnover
– Maximum trade size of 30% of average daily volume given a starting capital of
$500 million
– Maximum 9% tracking error
– No single holding less than 0.25% of the portfolio
– Holding size
§ Maximum 3% of portfolio, or
§ Maximum 5 times benchmark weight (B*5)
Note: Tracking error is defined as the annualized standard deviation of the active (excess) portfolio returns relative to the benchmark

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Source: S&P Global Market Intelligence, ClariFI test dates 1 Jan, 1995 to 1 Sep. 2016. For illustrative purposes only. Note: Past performance is not an indication of future results. Indexes are unmanaged,
statistical composites and it is not possible to invest directly in an index. These results are inherently limited because they do not represent the results of actual trading and were constructed with the benefit
of hindsight. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause
actual and back tested performance to be lower than the performance shown. Turnover is one-way.
Optimized Portfolio Results
E/P & ROIC 2-Factor Model
Constrained Optimization
S&P 1500 Universe
Jan. 1995 – Sep. 2016
Sharpe
Ratio
Annual
Return
Tracking
Error
Annual
Turnover
Avg.
P/E
Avg.
ROIC
Avg. Mkt.
Cap.($B)
Top 100, Max 3% Holding Size 0.61 12.7% 7.2% 55% 10.7 27.9% 27.7
Top 100, Max B*5 Holding Size 0.64 12.2% 6.0% 56% 12.6 25.1% 115.4
Benchmark (S&P 1500 Cap. Weighted) 0.51 9.7% - - 17.6 15.6% 79.5

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Risk Factor Neutralization –
Equity Risk Model From S&P Global Market Intelligence
21
Style Factor
Number of Constituent
Indicators
Constituent Indicator Highlights
Analyst Expectation 11
• Earnings & Sales Forecast
• Earnings Surprise
• Analyst Diffusion
• Analyst Revision
Capital Efficiency 10
• Return on Equity & Capital
• Leverage & Interest Coverage
• Issuance & Buybacks
Earnings Quality 26
• Balance Sheet Accruals
• Working Capital & Asset Turnover
• Capital Expenditure and R&D Intensity
• Margins, Payout Ratio
Historical Growth 31
• 1 & 3-year growth of
- Operating & Free Cash Flow
- Earnings
- Margins
Price Momentum 20
• 1, 6, 9 & 12-month Price Momentum
• Technical indicators over various time frames
• MACD, RSI, Slope, 52 Week High/Low
Size 2 • Log of Market Cap. & Sales
Valuation 34
• Reported & Forward Earnings Yield
• Dividend Yield
• Book to Price Sales, EBITDA & Cash Flow to Enterprise Value
• Inverse PEGY
Volatility 9
• Realized volatility
• CAPM Beta
• Distance from High to Low (1 & 12 months)
• Short Interest & Trading Volume

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Risk Factor Neutralization And Tilts – Example
22
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Top 100, Max
3% Holding
Size
Top 100, Max
B*5 Holding
Size
Benchmark
(S&P 1500
Cap.
Weighted)
Sharpe Ratio
Optimized Base Case
Optimized Factor
Neutral/Tilt 0%
2%
4%
6%
8%
10%
12%
14%
Top 100, Max
3% Holding
Size
Top 100, Max
B*5 Holding
Size
Benchmark
(S&P 1500
Cap.
Weighted)
Annual Return
Source: S&P Global Market Intelligence’s, ClariFI test dates 1 Jan. 1995 to 1 Sep. 2016. For illustrative purposes only. Note: Past performance is not an indication of future results. Indexes are unmanaged, statistical composites
and it is not possible to invest directly in an index. These results are inherently limited because they do not represent the results of actual trading and were constructed with the benefit of hindsight. The returns shown do not reflect
payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance
shown.
Style Factor Benchmark Relative Stance
Market Beta Neutral
Historical Growth Neutral
Valuation Positive
Capital Efficiency Positive
Earnings Quality Positive
12.7% 12.6% 12.2%
10.4%
9.4%

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Concluding Thoughts
23
• Avoid pitfalls of data mining
– Use economic intuition
– Check that the strategy is deriving returns (and risk) from intended exposures
• Combine complementary factors, e.g.
– Value & Quality/Capital Efficiency
– Momentum & Capacity Utilization [Aretz & Pope, 2015]
• Analyze investability with respect to liquidity, turnover, and transaction
costs/market impact
• Identify methods of risk control, e.g. risk model based vs. sector/country constraints
• Rules based vs. optimization based portfolio construction
– Tradeoff between transparency and flexibility

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Q&A
24

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Reference Addendum
25
Market Strategies International Research Report
Invesco PowerShares Capital Management LLC (January 2015)
The Evolution of Smart Beta ETFs | Gaining Traction in the Institutional Community
How smart are “smart beta” ETFs?
Denys Glushkov, University of Pennsylvania, 2015
Smart Beta: The Owner’s Manual
Kahn and Lemmon, Journal of Portfolio Management 2015
Excess Capacity, Momentum, and Long-Term Reversals
Aretz and Pope 2015
The Siren Song of Factor Timing
Asness 2016

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