Most exchange traded fund funds passively reflect the performance of an underlying benchmark index, but as the industry grows, more sophisticated indexing methodologies are being implemented, providing investors with active management styles through a passive wrapper.
At the ETF Virtual Summit on January 15, the featured panel on “Indexing Innovation: Launching ETFs to the Next Level,” which includes speakers from Morningstar, Charles Schwab, Russell Indexes and NASDAQ OMX Global Indexes, will highlight the changing face of indexing.
Traditional indices are based off a market-capitalization scheme where the largest stocks have the largest position within the index.
However, more index providers are crafting alternative, rules-based, factor-based or so-called smart-beta indices to meet changing investor needs.
“There’s more and more tools that financial advisors can use to help better manage their client’s portfolios, but as that new tool comes out, well somebody’s got to tell you how it works,” Ken O’Keeffe, Managing Director of Investable Products at Russell Investments, said in a recent interview.
For instance, smart-beta, intelligent, factor-based indexing has become one of the next big things in the ETF industry. [Russell Investments Educates Investors on ‘Smart-Beta’ ETFs]
“The smart-beta phenomenon is just an evolution of where we’ve been, and you’re going to see more of that evolution happening,” O’Keeffe said.
The original rules-based ETFs screened for high-dividend stocks, based on technical analysis and weighted companies by fundamental factors like earnings or valuations. The equal-weighting methodology may arguably be a form of enhanced indexing, as well. [What is an ETF? — Part 3: Enhanced Indexing]
Now, there is a growing subset of ETFs that offer strategy-based methodology that mimic active management but passively reflect hand-tailored indices that screen for specific qualities in an attempt to beat the market.
For instance, the underlying benchmark index may focus on factors like public company filings relative to frequency of trades, changes in holdings of company insiders and earnings analysis based on company returns.
Financial advisors interested in attending the annual virtual summit on January 15 can register at ETF Virtual Summit registration.