Dear John,

One could easily make the argument that Rob Arnott, founder and CEO of Research Affiliates, is the face of smart-beta indexing. In addition to his firm's own indexes, he has partnered with index providers such as FTSE, Russell, S&P Dow Jones Indices and Citigroup to create benchmarks based on his research, and frequently appears at conferences and in the media to speak about the Fundamental Index concept.

In the run-up to the 2nd annual Inside Smart Beta conference, June 8-9 in New York, Inside ETFs sat down with Arnott to discuss the current state of the "smart-beta union.”

Inside ETFs: What was it about cap-weighted investment strategies that didn’t appeal to you, that made you look in a different direction for an alternative way to invest?

Rob Arnott: While capitalization weighting makes an assumption that market prices are correct, intuitively they're not. The price of any stock represents its fair value, plus or minus an error. ... In the very long run, the errors are mean-reverting; they correct over time, creating the challenge of how do you do better than that. ...

And what's interesting is in the smart-beta arena—at least by the original definition of smart beta—the engine for all of these strategies is the same: It's a rebalancing of alpha. You're contra-trading against the performance chasers, the lemmings. And isn't that cool, to have a strategy that will contra-trade against the performance chasers?

So that's why I reject cap-weighting, and that's why I believe that for the patient, long-term investor, it's actually relatively easy to beat the market.

Continue reading the entire article here.

We hope you'll join us at our annual Inside Smart Beta conference. In addition to Rob Arnott, we've got keynote speeches from O'Shares Founder Kevin O'Leary and Goldman Sachs' Michael Swell. We've even got a speaker who's using artificial intelligence powered by IBM's Watson to out-smart smart beta. Check out the agenda and register today.

We look forward to seeing you in June.

Matt Hougan
CEO
Inside ETFs

Follow Us on Twitter:

Follow Us on LinkedIn: