While smart-beta ETFs are relatively cheap, compared to actively managed funds, some of the smart-beta strategies can charge higher fees, with some near active management prices. For instance, the cheapest alternative index-based ETF tracks a U.S. dividend equity strategy and comes with a 0.07% expense ratio, whereas the cheapest traditional beta-index ETF has a 0.04% expense ratio. Additionally, the most expensive smart-beta index ETF has a 1.66% expense ratio.
Johnson also mentioned that investors should stick providers that are experienced with running index funds since managing these types of alternative indices are more complex than indices with broad market exposure. Moreover, he argues that knowledgeable providers may be more reliable.
“A capable and responsible sponsor is going to emphasize launching investable strategies that have lasting investment merit and likely doing so at a low-cost as opposed to just chasing a fad and emphasizing marketability over a strategy’s actual investment merit,” Johnson added.
For more information on smart-beta ETFs, visit our smart beta category.
Max Chen contributed to this article.