More people are beginning to pick up enhanced, factor-based, smart-beta index exchange traded funds that provide an alternative to traditional index products. While the these ETFS offer investors more choices, investors need to understand the newer indexing methodology does come with its own considerations.
“There is no free lunch,” Rick Ferri, founder of Portfolio Solutions, said in a CNBC article, pointing to the higher-than-average management fees for the smart-beta ETFs.
U.S.-listed ETFs have have an average 0.61% expense ratio, with the cheapest coming in at 0.04%; however, ETFs that follow an enhanced indexing methodology have an average expense ratio of 0.64%, according to XTF data.
Nevertheless, investors should know that the factor-based index ETFs are still cheaper than actively managed funds that can charge annual fees north of 1%. [WisdomTree: What Is Smart Beta Anyway?]
Factor-based ETFs, which follows an index that weights companies based on factors like book value or dividends, among others, provide active management styles in a passive wrapper. Additionally, the ETFs, like stocks, can be bought or sold on an exchange through normal trading hours. [Getting a Handle on Smart-Beta ETFs]