Some advisors and investors may argue that these are gilded days for intelligent indexing and so-called smart beta exchange traded funds. Others are not as far along in the conversion process.
Even with that, there is no denying that smart beta ETFs are on the rise. Through the end of October, year-to-date inflows to such ETFs were $45 billion, bring smart beta’s slice of the $1.63 trillion U.S. ETF market to $263 billion. [How Smart Beta Stack-Up Against Traditional Benchmarks]
There are, however, considerations to be made with intelligent indexing. Some smart beta ETFs outperform traditional rivals, but “higher returns may come with more risk. Many of these funds plunged more than the overall market in 2008, for instance, though they rebounded strongly in 2009. That combination suggests that some fundamental-index funds are more volatile than their vanilla rivals,” according to Kiplinger’s Personal Finance.
One way of properly embracing smart beta ETFs is to not go “all in” on these funds. Anthony Davidow, an asset allocation strategist at Schwab, prefers a 60%-40% mix of fundamental and traditional index funds, Kiplinger’s reports.
California-based Charles Schwab (NYSE: SCHW) unveiled its own lineup of six fundamental ETFs earlier this, which are available on a commission-free basis to Schwab clients. [Schwab Introduces Fundamental ETFs]
Kiplinger’s flagged several smart beta ETFs that are at have five-year track records and at least $150 million in assets under management. The group includes the RevenueShares Large Cap Fund (NYSEArca: RWL), which takes the S&P 500 members and weighs them by annual revenue.