For instance, FEP market-cap weights include mid-caps 24.8%, large-caps 24.2% and mega-caps 9.1%; FDD weights include mid-caps 37.6%, large-caps 34.6% and mega-caps 27.8%. On the other hand, VGK includes 56.8% in mega-caps, 31.9% in large-caps and 11.2% in mid-caps.
The quick growth in these strategic beta or alternative beta index-based ETFs allow investors and advisors to make more targeted investments in European markets. Additionally, studies have shown that alternatively weighted indices have outperformed market cap-weighted indices by as much as 2% per year between 1969 and 2011.
“Both institutional and retail investor interest in these strategies have accelerated in the past several years,” a group of Moody’s analysts said in a recent report. “It still has substantial room to grow.”
Nevertheless, smart-beta ETFs are not without their risks. During a broad market sell-off, or a risk-off environment, riskier small-caps will take a hit. [Institutions Warm to Smart Beta ETFs]
“If the European economy shows signs of weakness and or certain local European markets show signs of weakness, then these ETFs because of their smaller-cap nature are more likely to get hurt,” Rosenbluth added.
For more information on Europe-related ETFs, visit our Europe category.
Max Chen contributed to this article.