Strategic- or smart-beta indices are the hot strategy in the exchange traded fund industry. Before dabbling in one of these relatively new ETF investment tools, investors should do their due diligence to better understand the products.

For starters, Susan Dziubinski, Director of Content with Morningstar, defines the new breed of strategic ETFs as an active-passive hybrid, or index-based funds that make active bets. These smart-beta ETFs try to improve the risk or return characteristics of traditional market-capitalization-weighted indices, such as the S&P 500.

The smart-beta index-based ETFs try to boost returns or diminish risk by focusing on more or more factors, such as value, growth or volatility, among others. As a result, investors will have to look deeper into a smart-beta ETF’s strategy to understand how the fund works. [Look Before Leaping Into Smart-Beta ETFs]

The alternative index-based strategy has been around longer than most might believe. For instance, the iShares Russell 1000 Growth ETF (NYSEArca: IWF) and iShares Russell 1000 Value ETF (NYSEArca: IWD) may arguably be among the first smart-beta ETFs to track customized indices other than a market-cap-weighted methodology, debuting back in 2000.

Although, more defined smart-beta ETFs, such as the fundamental index-based the PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF), are nearing a 10-year anniversary.

As the ETF industry grows, strategic-beta funds are becoming increasingly complex. During the nascent stages of the alternative index-based ETF growth, investors would pick from mores straightforward styles, such as value, growth, dividends, asset category and even equal-weight methodologies. However, as the industry matures, we are seeing more factor-based styles from RAFI, Dorsey Wright, WisdomTree and First Trust’s AlphaDEX, among others, that mix multiple factors into a single investment offering. Consequently, it is up to investors to know what they are getting themselves into.

“Investors’ due-diligence processes for these funds need to be every bit as rigorous as those they would undertake in scrutinizing active managers,” according to Morningstar.