Fundamental index exchange traded fund methodologies can provide an alternative way to access the market, but potential investors should familiarize themselves with how the investment vehicle works.
The new breed of fundamental, or “smart-beta,” ETFs track indices that are constructed based on factors like strong balance sheets, steady earnings growth or dividend growth. In comparison, traditional beta index ETFs follow a market-capitalization methodology.
Due to the way stocks are selected, fundamental ETFs act like value investments, writes Brendan Conway for Barron’s.
Consequently, Conway warns that value investing is not always easy. Many investors may have to wait years before the right conditions line up. [How ‘Smart-Beta’ ETFs Fit in a Portfolio]
“You have to be in these strategies for the long haul,” Rick Ferri, founder of Troy Portfolio Solutions, said in the article.