FINRA put smart-beta ETFs that track alternatively weighted indices on notice in January, arguing that it would look for sales violations among the funds this year. Specifically, the watchdog is concerned about the complicated nature of the funds and market swings’ potential impact on indicies tied to the ETFs.
The strategic beta, scientific beta, factor-based investing or fundamental indexing ETFs are all comprised of rules-based indices that implement a highly regimented investment objective and mirrors actively managed styles. [The Growing Smart-Beta ETF Space]
“For individual investors, products tracking these indices may be complex or unfamiliar,” according to FINRA. “Moreover, ETPs tracking these indices may be thinly traded and have wide bid-ask spreads, making these funds more costly to trade, in addition to their generally higher expenses. Some alternatively weighted indices may have significantly higher turnover than more traditional indices, leading to greater transaction costs for ETPs that track them. While back-tested results and some academic research have highlighted the potential efficacy and attractiveness of alternatively weighted indices, it remains an open question how the indices and products tracking them will behave in different market environments going forward.”
For more information on smart-beta index funds, visit our smart beta category.
Max Chen contributed to this article.