“Smart indices are built using various factors that will create biases, of which the investor must be aware,” Fuhr said in the article. “Equal-weight indices have a small-cap bias while fundamental indices have a value bias. These biases are the reasons that the indices perform differently than market cap.”
Additionally, investors should also understand that these strategies may also experience periods of underperformance over the short-term, compared to market-cap indices.
According to State Street Global Advisors, there was $142 billion invested in factor based-strategies at the end of the first quarter of 2013. Factor-based strategies have attracted $81.6 billion over the past three years, with ETFs accounting for $66.2 billion. Optimistic projections point to these strategies growing to 30% of passive equities, or about $6 trillion, in the next five years.
For more information on ETF indices, visit our indexing category.
Max Chen contributed to this article.