Exchange traded fund providers have focused in on alternative index weighting methods as existing products have been on a winning streak. Non-market cap-weighted ETFs have accounted for about $31.4 billion assets year-to-date, according to BlackRock data.

“ETFs are not just about passive exposures,” says Dodd Kittsley, head of global ETP market trends research at BlackRock. “Whether you define it as a strategy-based or smart index, I think the growth potential is enormous.” [WisdomTree ETF Assets Grow as Shares Rally 74%]

ETFs that focus on low-volatility stocks, equal-weight methods or other factors other than market capitalization have proven their potential based on the $31.4 billion in inflows year-to-date. ETF sponsors are aware that alternative weighting methods have been able to capture assets and see this as an area they can set themselves apart, reports Jackie Noblett for Ignites. [Low-Volatility ETFs Still Thriving as Market Wobbles]

Index diversification is like a new frontier in the ETF industry. Many of the cap-weighted indices are top heavy, and dominated by a few stocks, reports Scott Blythe for Advisor.CA.Within a market-cap index, there can be a huge correlation between mispricing and overweighting, Jacques Lussier, former chief investment strategist at Desjardins Financial, said.

Of the five top-selling ETFs for last month, three of them were non-market-cap weighted index trackers:

  • WisdomTree Japan Hedged Equity ETF (NYSEArca: DXJ) $1.5 billion in inflows
  • iShares MSCI USA Minimum Volatility (NYSEArca: USMV) $990 million in inflows
  • PowerShares S&P 500 Low-Volatility (NYSEArca: SPLV) $924 million in inflows

 “Transparent, strategy- or rules-based exchange-traded funds are successful because there is a need in the marketplace to reflect a particular view,” Kittsley says. “To me, this is the sweet spot around the thought of active ETFs,” he adds.

However, alternative-weighted indices are not going to continue to outperform traditional market-cap tools. Investors that are jumping into the fundamentally-weighted indices simply because of performance should consider how they work, rather than just what is working now. [Special Report: Alternative ETFs]

“There certainly has been a lot of discussion and interest in these alternative-weighted indexes, but I’m not so sure how much of the discussion is about market cap versus non-market cap than is around relative performance,” says Joel Dickson, principal in the investment strategy group at Vanguard.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.