Investors are piling into so-called enhanced, fundamental, factor-based, smart-beta index exchange traded funds that have been outperforming traditional market-captitalization weighted ETFs. However, investors should not blindly jump into these strategies before they fully understand how the products work.

The new breed of smart-beta ETFs follow customized benchmark indices that weight component holdings based on factors, like dividends or sales. Advocates have pointed out that some methodologies have generated returns that beat traditional benchmarks, like the S&P 500, over the past five-years, reports Alexis Xydias for Bloomberg.

“It feels like an inflection point for these strategies,” Daniel Pytlik, a manager at Bank Julius Baer & Co., said in the article. “There seems to have been an acceleration of both demand for and supply of smart beta. Lots of things are going on in terms of the debate around the topic.”

According to Bloomberg data, smart-beta ETFs attracted $43 billion last year and now hold $156 billion in assets under management as of the end of February.

However, due to the specialized nature of the underlying indices, smart-beta ETFs issuer higher annual fees than the traditional beta-index ETF.

Additionally, smart-beta ETFs tend to lean toward mid- and small-sized companies, which tend to experience greater swings during a risk-off environment, but the tilt helped the ETFs outperform during market rallies, as witnessed last year. [What to Look for in Smart Beta ETFs]

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