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Understanding Smart Beta 2.

Exchange-traded funds (ETFs) have grown to over $2 trillion in U.S. assets. Smart beta ETFs encompass
one-fifth of this market share - about $400 billion. (Source: Bloomberg Markets, July/August 2015
There has been an evolution from market cap-weighted indices into Smart Beta and now, the construction
of Smart Beta 2.0, designed to provide:

Enhanced diversification
Addressing a more sophisticated risk/return profile
Capability to accommodate a changing market environment

How did we advance to Smart Beta 2.0? First, lets begin with addressing market cap-weighted indices
potential drawbacks.

Market Cap Index

Market cap-weighted indices weight stocks in proportion to their total market capitalization .

Weight in Market
Cap Index

Largest Market Cap

The larger the company by market cap,

the heavier the weighting. In indices
that are market-cap-weighted, larger
stocks are more heavily weighted than
smaller ones.

Number of Stocks in Index



Market cap weighting tends to affect the indices performance as larger

stocks dont necessarily perform better than smaller stocks. In this
scenario, known as a broadbased index, the intention is to provide
diversified exposure to a variety of stocks; but under this weighting regime,
the large stocks may tip the scale more than other constituents. Value
stocks have been academically shown to outperform growth, however, this
market cap weighting scheme favors growth stocks over value stocks.

Smart Beta Index

To potentially improve on this weighting strategy, Smart Beta indices apply both an alternative selection
and weighting methodology.

Stock Universe

Stocks are selected from the broader universe based

not exclusively by market cap, but by other factors.
Stock returns can be driven by several unique factors.
Based on the current status of academic research,
there is a consensus on four factors:

Low Volatility

While these differing approaches to selection criteria (low volatility, value, momentum, or size) potentially
enhance performance and broaden diversification, each strategy is dependent on the market environment in
which it operates.
Some years low volatility outperforms, some years value
outperforms, and this goes for the rest of the four factors as well.















For illustrative purposes only. Does not represent actual market data. Past performance is not indicative of future results.

To address this yearly performance

variance, some Smart Beta funds take the
sophisticated approach of integrating all
four of these factors together.
But how do you weight the 4 factors?


Some smart beta strategies equally weight the four factors.

This may potentially improve the performance some years,
but it doesnt allow for the broadest diversification.

Smart Beta 2.0 Index

Hence the development of Smart Beta 2.0. For a more broadly-diversified portfolio with the potential for
optimized performance from year-to-year, five different weighting strategies are each applied to each of the
four factors.
Stock Universe

From a universe of stocks, we identify four factors.

Low Volatility

The five weighting strategies are applied to each of the four factors.

5 Weighting Strategies

Maximum Deconcentration

The four weighted factors are combined

together equally resulting in a diversified
index fund with a targeted optimal
risk/return profile as the end product.

Risk Parity

Maximum Decorrelation

Minimum Volatiliy

Maximum Sharpe ratio

Smart Beta

Important Information

An investor should consider the investment objectives, risks, charges and expenses of the
ETF carefully before investing. To obtain a prospectus containing this and other important
information, call 1-212-918-4954 or 844-ETFS-BUY (844-383-7289) or visit Read the prospectus carefully before investing.
Fund Risk: There are risks associated with investing including possible loss of principal. The prices of the securities in which
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Beta United States Multi-Beta Multi-Strategy Equal-Weight Index (Index) to track general market performance. Licensors only relationship to
ETF Securities Limited (Licensee) is the licensing of the Indices that is determined, composed and calculated by Licensor without regard to the
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ETFS Diversified-Factor U.S. Large Cap Index Fund (SBUS) - seeks to track the price and yield performance, before fees and expenses, of the
Scientific Beta United States Multi-Beta Multi-Strategy Equal Weight Index.
ETFS Diversified Factor Developed Europe Index Fund (SBEU) - seeks to track the price and yield performance, before fees and expenses, of the
Scientific Beta Developed Europe Multi-Beta Multi- Strategy Equal Weight Index
The ETF is a new product with a limited operating history.
Beta is a measure of the volatility, or systemic risk, of a security or a portfolio in comparison to the market as a whole.
Sharpe Ratio - Sharpe ratio is a way to examine the performance of an investment by adjusting for risk. A higher Sharpe ratio indicates a greater
historical risk-adjusted performance.
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Indices are unmanaged and one cannot invest directly in an index.
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EFS000144 12/31/2016