MarketGrader Strikes Smart Beta Deal in China

The U.S.-based stock research firm will begin offering smart beta indexes to the Chinese market in May.


MarketGrader will begin offering smart beta indexes in China, betting funds using the strategy will become as popular among the Chinese as they’ve been in the U.S.

A smart beta index consists of companies identified by a set of rules that screen for certain stock characteristics such as value or growth to produce returns. Funds using the investment strategy have proliferated in the U.S., in a ‘smart’ bid to beat market value indexes such as the Standard & Poor’s 500.

MarketGrader, a stock research firm based in Coral Gables, Florida, will begin providing smart beta indexes in partnership with China Securities Index Co. in May. They’ll start with the CSI MarketGrader China A-Shares 200 Index and the CSI MarketGrader China A-Shares New Economy Index, which are designed to identify financially strong companies using a proprietary, ‘growth-at-a-reasonable-price’ stock selection method in the world’s second largest economy.

Carlos Diez, founder and chief executive officer of MarketGrader, says the firm started building its research coverage of companies in China four years ago, positioning itself to enter the nation’s investment management industry, which started as recently as 1998. According to Morningstar, there was just $256 million invested in smart beta exchange-traded funds in mainland China in June 2016, compared to close to $500 billion in the U.S.

“The gap between those two numbers is a great opportunity for us,” Diez said in an interview. “Chinese investors are still speculators. But we know that will change and we wanted to be there early.”


While smart beta isn’t yet popular in China, the country already has $63 billion invested in exchange-traded funds, according to Morningstar.

Diez says asset managers in China are highly aware of the U.S. trend toward smart beta investments, and many are ready to bet that Chinese investors will prefer smart beta over simple, market-value-weighted funds. Starting next month, asset managers can license MarketGrader’s smart beta indexes tracking Chinese companies, according to Diez, who says sovereign wealth funds and insurance companies are likely to embrace the new investment product.

Best known for its Barron’s 400 Index, MarketGrader uses a range of fundamental research measures to sift through stocks. The firm offered its first smart beta index, which ranks companies based on 24 indicators, in 2003. The advantage of smart beta is that the index can be customized to avoid certain types of securities.

MarketGrader is not the first smart beta index provider in China, where funds must use CSI-listed benchmarks. Rob Arnott’s Research Affiliates has a business in Hong Kong called Rayliant Global Advisors that offers smart beta investments customized for the Asian market.