These smart beta indexing methodologies try to prove an alternative to market-cap-weighted indices. Critics argue that traditional passive indices tend to overweight overvalued stocks, or in bond indices, the most heavily indebted issuers, which may expose investors to undue risks.
Smart beta is “quite a healthy development, because it fractures and diversifies the investment community” and mitigates the natural human tendency to herd around the hottest stocks, George Cooper, author of The Origin of Financial Crises and a critic of index investing, said.
With a greater number of providers rushing into the space, fees charged for licensing indices, and for investors, are under downward pressure. Without a defined powerhouse enjoying a first-mover advantage, the smart-beta ETF space is still pretty much up for grabs.
“The pros are the third party and the brand. You pay a small fee, but the view was that you needed someone else’s imprimatur. Now, the market doesn’t care who draws it up,” Nick Smithie, head fo research at Emerging Global Advisors, told the FT.
There are now about 479 U.S.-listed enhanced index-based ETFs on the market, with $246.4 billion in assets under management, according to XTF data. The largest is the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), which attracted over $15 billion in net inflows so far this year. HEDJ provides Eurozone exposure and hedges against a depreciating euro currency.
For more information on smart-beta funds, visit our smart beta category.
Max Chen contributed to this article.