Even if smart- or strategic-beta exchange traded funds provide interesting investment strategies, investors should still check the costs as some passive strategies may come with higher fees.

Ben Johnson, Director of Passive Manager Research at Morningstar, argues that when looking at strategic-beta ETFs, investors should consider costs and the underlying index.

“I think investors should focus on costs in virtually all contexts, but I think in this context, it’s particularly important because in many cases index providers, ETF providers are using this sort of innovation, this increased complexity as a way to justify relatively higher fees vis-a -vis a traditional broad-based market index exposure,” Johnson said.

For instance, there are over 400 U.S.-listed ETFs that follow an enhanced indexing strategy and come with an average 0.62% expense ratio, according to XTF data. In contrast, traditional beta-index-based ETFs have an average expense ratio of 0.56% and actively managed ETFs have an average 0.83% expense ratio.

The strategic beta, scientific beta, factor-based investing or fundamental indexing ETFs are all based on a rules-based indices that implement a highly regimented investment objective that mirrors actively managed styles. [The Growing Smart-Beta ETF Space]

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