According to Research Affiliates, it is a product’s ability to adhere to a set discipline that has helped intelligent indexing outperform market-cap benchmarks. [Smart-Beta ETFs Beating Active Mutual Fund Rivals]
“The trick is that you always sell what’s gone up in price and buy what’s gone down,” Jason Hsu, chief investment officer at Research Affiliates.
Potential investors should also be aware that smart-beta ETF fees are higher than beta-indexed ETFs – smart-beta ETFs have an average annual expense ratio of 0.49%, whereas the cheapest broad market ETF comes with a 0.04% expense ratio. Nevertheless, smart-beta ETFs are still cheaper than stock mutual funds, which have an average expense ratio of 1.4%.
Some of the largest fundamental, smart-beta index ETFs include:
- PowerShares FTSE RAFI US 1000 (NYSEArca: PRF): up 29.1% year-to-date
- First Trust Health Care AlphaDEX Fund (NYSEArca: FXH): up 38.9% year-to-date
- First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca: FXD): up 35.7% year-to-date
- First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG): up 35.9% year-to-date
- PowerShares FTSE RAFI 1500 Sm-Mid (NYSEArca: PRFZ): up 33.7% year-to-date
For more information on ETF indexing, visit our indexing category.
Max Chen contributed to this article.