Enhanced index, rules- or strategy-based exchange traded funds are a relatively new industry innovation that has garnered a very large following over a short period of time. While these funds are passive in nature, they also exhibit active fund characteristics.
Intelligent Indexing. Passive ETFs try to reflect the performance of an underlying benchmark Index, which tend to follow a market-capitalization weighting methodology. The new breed of benchmark Indices have been hand-tailored for needs of ETFs. For instance, the rules-based benchmark Indices select investments based on certain merits, like earnings, valuations, momentum, volatility or insider activity. [ETFs as Tactical Investing Tools]
A Cheap Active Fund Alternative. The rules- and strategy-based ETFs offer investors cheap and easy access to investment strategies that would require time and added expense to replicate on their own. [Index ETFs with Active Strategies]
Track Record. It should be noted that a majority of these new rules-based ETFs have only just hit the market last year. Potential investors should monitor prospective ETF investments to see how they work and trade. Specifically, some funds may be rebalanced or reconstituted on a monthly basis while others may change holdings quarterly, semiannualy or even once a year.
Investors who are tired of the plain vanilla ETFs already on the markets may find these alternatives from such providers as Direxion, Guggenheim, iShares, PowerShares, Russell Investments and WisdomTree. [How ETFs Have Evolved]
For more information on ETF indexing, visit our indexing category.
Max Chen contributed to this article.