Most mutual fund providers inherently steer away from the passive indexing style found in exchange traded funds. However, the “enhanced” indexing methodology may provide a good comprise that fits just right.
“Several fund families have worked out entire investment disciplines anchored around the notion that capitalization weighted indexes are inherently flawed,” said Nicholas Colas, Chief Market Strategist at ConvergEx, in a research note.
The phenomenal growth in Apple (NasdaqGS: AAPL) highlights this point as the single stock component influences the overall direction of a benchmark index. [Apple, PowerShares QQQ in Focus on Nasdaq-100 Rebalance]
As the ETF universe expands, so too must the investment options. There is a growing number of ETF products that provide a diversified stock portfolio that reflects some specific and quantifiable goal. For instance, some ETFs are based on an Index that mitigates volatility while generating equity-like returns. Some provide dividend-paying stocks while weighting components to optimize cash flow and keeping a diversified portfolio.
“But most notable, one person mentioned that these products were very popular with investors who were interested in moving from mutual funds to ETFs,” Colas added.
Investors are seeking out alternative investments that generate more than the plain vanilla, passive indexing methodologies but are also loath to take on the higher fees in active management.
“To them, the idea of an ‘Enhanced’ index is a sensible middle ground,” Colas noted.
For more information on ETF indexing styles, visit our indexing category.
Max Chen contributed to this article.