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.
That results in an ETF dominated by consumer stocks (discretionary and staples combine for 38%) and to a lesser extent, energy at almost 15%. Apple (NasdaqGM: AAPL) is the largest member of the S&P 500, but in RWL, that stock is fourth behind Dow components Wal-Mart (NYSE: WMT), Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).
Three WisdomTree (NasdaqGM: WETF) ETFs were highlighted by Kiplinger’s. WisdomTree, the fifth-largest U.S. ETF sponsor, weighs many of its ETFs by the ability of the funds’ holding to grow and maintain dividends or, in the case of the WisdomTree MidCap Earnings Fund (NYSEArca: EZM) core earnings.
EZM focuses on core earnings “computed by Standard & Poor’s, as the weighting metric. Core Earnings is a standardized calculation of earnings developed by Standard & Poors designed to include expenses, incomes and activities that reflect the actual profitability of an enterprises ongoing operations,” according to WisdomTree. [Broad Market ETFs Hitting New Highs]
EZM is up 31.4% this year and has touched a series of record highs. The WisdomTree International SmallCap Dividend Fund (NYSEArca: DLS) and the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS) were also highlighted by Kiplinger’s. Those two funds have $2.55 billion in combined assets under management. Both weigh components by annual dividends paid.
RevenueShares Large Cap Fund
ETF Trends editorial team contributed to this post.