Smart beta, arguably the newest phenomenon in the exchange traded funds business, is more than just a fad. Year-to-date inflows of more than $45 billion to U.S.-listed smart beta funds confirm as much.
Not only are assets under management at smart beta ETFs growing, but so is the number of funds that dwell in the space. Earlier this year, Charles Schwab introduced six fundamental index ETFs. Those ETFs track the Russell Fundamental Index Series, which is based on methodology developed by Rob Arnott and Research Affiliates. [Schwab Launches Smart-Beta ETFs]
However, the concept of “intelligent” indexing is not new. ETF sponsors such as First Trust, FlexShares and PowerShares have expansive lineups of non-cap weighted funds that have tens of billions in assets under management combined. [Advisors Warm to Smart Beta ETFs]
That is to say in a growing universe of smart beta funds, some worthwhile products may be going overlooked. Some are broad market funds, others are plays on foreign markets, developed and emerging, while others are sector ETFs.
And that is what we are going to do in this slideshow: Unearth some of the hidden gems of the smart-beta ETF arena. That means this list’s constituents are not ranked by returns, the methodology used for some of our other recent slideshows. [Best Global Markets by Single Country ETFs]
Here, we are simply exploring smart beta ETFs with potential to deliver for investors going forward. Included are assets under management totals, year-to-date performances and a comment on each fund.
Schwab Fundamental Emerging Markets Large Company Index ETF (NYSEArca: FNDE)
AUM: $13.7 Million
YTD Gain/loss: Up 9% since August debut.
Comment: The Schwab Fundamental Emerging Markets Large Company Index ETF entered a crowded field of fundamentally-weighted emerging markets ETFs when it debuted a few months ago, but FNDE possesses the same advantage that many other Schwab ETFs do: Low costs. With a 0.46% annual expense ratio, FNDE is the cheapest emerging markets smart beta ETF currently on the market. And Schwab clients can trade the new ETF commission-free. [Schwab Debuts Fundamental ETFs Based on Russell Indices]
First Trust Health Care AlphaDEX Fund (NYSEArca: FXH)
AUM: $1.3 Billion
YTD: Up 42.1%
Comment: Calling a $1.3 billion ETF overlooked is tricky, but compared to other health care funds, FXH does not grab a lot of attention. Perhaps it should. Like the other AlphaDEX sector funds, FXH’s weighting methodology includes an emphasis on factors such as price appreciation, one-year sales growth cash flow to price and return on assets. The recipe has worked this year as FXH has outperformed the Vanguard Health Care ETF (NYSEArca: VHT) by 400 basis points.
PowerShares DWA Momentum Portfolio (NYSEArca: PDP)
AUM: $1.09 Billion
YTD: Up 26%
Comment: PDP recently topped the $1 billion in assets under management mark, but despite its asset-gathering prowess and impressive performance this year, the market-based fund flies under the radar. Like several other PowerShares ETFs, PDP focuses on relative strength to build its roster of 100 stocks, nearly two-thirds of which are mid-caps. [Another Momentum ETF Tops $1B in Assets]
iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL)
AUM: $193.6 million
YTD: Up 8.8% since July debut
Comment: BlackRock’s (NYSE: BLK) iShares, the world’s largest ETF sponsor, is looking to bolster its smart beta footprint and QUAL is one of the firm’s offerings on that front. The ETF is home to 124 stocks weighted by high return on equity, stable year-over-year earnings growth and low financial leverage. Technology is by far the largest sector allocation at 38%, nearly double the weight given to consumer discretionary. Seven of QUAL’s top-10 holdings are tech stocks.
FlexShares Quality Dividend Index Fund (NYSEArca: QDF)
AUM: $295.8 million
YTD: Up 29%
Comment: QDF is just a few weeks shy of its first anniversary and it is safe to say the ETF is off to a banner start. Coming to market in the midst of what seem believe is the gilded era for dividend stocks and ETFs probably helps. QDF’s holdings are not just weighted by expected dividends, but also by profitability, solid management, and reliable cash flow. Up 29% this year, QDF has outpaced the three largest U.S. dividend ETFs by noticeable margins.
FlexShares International Quality Dividend Defensive Index Fund (NYSEArca: IQDE)
AUM: $15.9 million
YTD: Up 8.5% since April debut
Comment: IQDE is the international equivalent of QDF, though the former is newer than the latter having debuted in April 2013. Companies in IQDE’s underlying “index are selected based on expected dividend payment and fundamental factors such as profitability, solid management and reliable cash flow,” according to FlexShares. The U.K., Japan and Canada combine for 36% of IQDE’s weight.
PowerShares Dynamic Technology Sector Portfolio (NYSEArca: PTF)
AUM: $36.1 million
YTD: Up 26.5%
Comment: The PowerShares Dynamic Technology Sector Portfolio dispels two notions about tech ETFs: That they need to be large and heavily allocated to the sector’s most prominent names to excel. PTF has jumped 26.5% this year with just $36.1 million in assets with NO exposure to Apple (NasdaqGM: AAPL), Google (NasdaqGM: GOOG) or Microsoft (NasdaqGM: MSFT).
First Trust Large Cap Core AlphaDEX Fund (NYSEArca: FEX)
AUM: $640.9 million
YTD: 27.1%
Comment: With a dizzying array of U.S. large-cap ETFs on the market, a few are bound to go overlooked. Such is life for FEX, but that hardly means this is not an ETF worth considering. FEX is underweight the S&P 500’s two largest sectors – technology and financial services, but that has not stood in the way of performance. FEX’s underlying index, the Defined Large Cap Core Index, has outperformed the S&P 500 by 442 basis this year, according to First Trust data.