What to Look for in 'Smart-Beta' ETFs | ETF Trends

With fund sponsors coming up with new ways to invest in the market, exchange traded fund investors can now passively track so-called smart-beta, factor-based, strategy indices that provide active styles.

Traditional beta-index ETFs passively reflect major capitalization weighted market indices and segments. On the other hand, strategy ETFs provides alternative exposure that tries to beat the market or track a type of enhanced exposure, according to Samuel Lee, a strategist for Morningstar.

“These ETFs are what you could call quasi-actively managed because they do represent active tilts against the market,” Lee said.

For instance, the strategy ETFs select component stocks based on cash flow, book value, sales, dividends, volatility and momentum, among others.

Lee highlights the iShares suite of Factor ETFs, specifically the quality and momentum offerings, due to their cheap expense ratios, with most of them coming in at 0.15%, and component inclusions based on sound academic research.

The Factor ETFs include the iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL), iShares MSCI USA Size Factor ETF (NYSEArca: SIZE), iShares MSCI USA Value Factor ETF (NYSEArca: VLUE) and iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM).

The iShares MSCI USA Quality Factor ETF provides a type of Warren Buffett portfolio of companies with high profit margins, low earning variability and low debt.