In the alternative index space, investors will have to scrutinize the indices even further. For instance, Research Affiliates Fundamental Indices track companies based on factors like book value, cash flow, sales and dividends. Dorsey, Wright & Associates’ DWA Technical Leaders Indices may pull companies based on relative strength. These types of alternative indices are associated with so-called smart- or strategic-beta ETFs that track enhanced, multi-factored or fundamental indices as opposed to traditional market-cap weighted methodologies. [Winning: Smart Beta ETFs Keep Gaining Traction]
Since many of the alternative index-based ETFs have disparate strategies, investors likely find less overlapping styles in this area of the ETF space. However, when picking among competing ETFs with similar strategies, investors should also compare the funds’ costs, efficiency, liquidity and breadth. Specifically, Beck points to assets under management, expenses, holdings, tracking error, and trading spreads.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.