Fundamental or “smart-beta” index-based exchange traded funds are quickly becoming an attractive alternative to traditional market-capitalization funds as investors diversify and become more accustomed to the ETF vehicle.
The new breed of passive smart-beta ETFs select stocks according to fundamental factors like price-to-earnings ratios or volatility, reports Joe Light for the Wall Street Journal.
“A lot of these alternative-weighted approaches really have evolved from active quantitative strategies that were in the investing marketplace 20 years ago,” Joel Dickson, a senior ETF strategist at Vanguard Group, said in the article
In comparison, traditional beta-index ETFs passively reflects established benchmarks, like the S&P 500 (^GSPC), which weights holdings based on market capitalization. Essentially, the biggest stocks have the greatest influence on the portfolio.
Smart-beta ETFs are gaining traction among investors, attracting over $45 billion in assets this year. The new fund category now holds about $263 billion in assets under management, compared to the total $1.63 trillion U.S.-listed ETF market.
Some market observers argue that smart-beta index funds provide investors with an active strategy in an ETF wrapper. However, unlike actively managed funds, smart-beta ETFs have outperformed market capitalization-weighted indices. [‘Smart-Beta’ ETFs Show Higher Returns with Higher Volatility]