Instead of the tracking the S&P 500 through a traditional capitalization-weighted index exchange traded fund, investors can access the broad U.S. markets through “enhanced” or “smart-beta” index funds that try to mimic actively managed investment styles.
These smart-beta ETFs deviate from traditional large-cap indexing, adhering to standard formulas or set investment rules instead, reports Conrad De Aenlle’s for MarketWatch. Beta refers to the measure of volatility, or systematic risk, of a holding compared to the overall market.
De Aenlle points out that smart-beta ETFs Guggenheim S&P 500 Equal Weight (NYSEArca: RSP) and PowerShares FTSE RAFI U.S. 1000 Portfolio (NYSEArca: PRF) provide investors with broad exposure to U.S. markets but offer superior returns. [Some Enhanced ETFs Beating Their Benchmarks]
Year-to-date, RSP has gained 16.5% and PRF is up 17.0%. In comparison, the S&P 500 Index returned 14.4%. Since 2006 when PRF first started trading, the PRF and RSP have generated total cumulative returns of 62% and 60%, respectively, compared to the 33% gain in the S&P 500.
Traditional large-cap indices, like the S&P 500, have a higher stake in companies with larger market values. Looking at the largest components, these companies no longer enjoy big growth spurts and their stocks may even be overvalued.