Davidow also suggests advisors and investors could incorporate smart-beta ETFs based on different preferences. For those who are worried about tracking errors, fundamental index-based funds may exhibit larger deviations. Fundamental-based ETFs, though, do not provide downside protection. As Davidow argues, smart-beta funds could generate alpha. Additionally, the strategic-beta options, like other ETFs, come with low fees, compared to active funds.
Looking ahead, the smart-beta ETF space could be on the verge of a boom as investors, faced with an aging bull market, rising rates and other head winds, could seek new ways to capture returns, writes Jeff Benjamin for InvestmentNews. [Large Waves in the Smart-Beta ETF Space]
Specifically, some are addressing the shortcomings of cap-weighted index funds. Since market-cap indices would overweight the largest stocks, companies that have outperformed would gain a larger tilt, so investors may be overexposed to the best performers. Instead, smart-beta ETFs could allow investors to tap into companies with strong fundamentals or other factors that could weather the changing environment ahead.
For more information on smart-beta strategies, visit our indexing category.
Max Chen contributed to this article.