When shopping around, investors may notice that some factors are more “proven” than others, such as value investments.
“Some betas–or factors–are well grounded in economic and/or behavioral patterns,” Morningstar director John Rekenthaler said. “That is, they are associated with real risks, which is why they offer real and ongoing higher returns.”
Moreover, investors may have to be patient as some factor-based index strategies shine when held with a long-term investment horizon. [Low-Volitility ETFs Can Still See Swings in Short Timeframes]
Lastly, investors should still mind the fees. While strategic-beta funds typically have similar costs to the overall ETF industry, some may offer cheaper fees than others. There are currently about 1100 passively managed U.S.-listed ETFs with an average 0.56% expense ratio, and some of the cheapest index-based ETFs have a 0.04% expense ratio, according to XTF data. Meanwhile, the 461 U.S.-listed enhanced ETFs on the market have a slightly higher 0.62% average expense ratio. [Costs, Provider Know-How Matter with Smart-Beta ETFs]
For more information on smart-beta index funds, visit our smart beta category.
Max Chen contributed to this article.