Smart-beta or alternative index-based exchange traded funds have experienced rapid growth as more institutional and retail investors shift away from traditional beta funds to diminish risk and potential generate greater returns.
On the upcoming webcast, Fundamental Index: Inside 10 Years of Excess Return, Rob Arnott, Chairman and CEO of Research Affiliates, and John Feyerer, Director of Equity ETF Product Strategy at Invesco PowerShares, will discuss the strategy behind one of the first smart-beta ETFs that has been helping investors generate improved risk-adjusted returns for over a decade.
The PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF), which started trading on December 19, 2005, ranks among the longest running smart-beta ETFs in the U.S. markets. Specifically, PRF tracks 1,000 U.S. stocks that show the highest fundamental strength, which is based on the RAFI fundamental indexing methodology that screens for sales, book value, cash flow and dividends.
Due to its indexing methodology, ETF investors may find that PRF acts like a value strategy. PRF includes a 37.5% tilt toward large-cap value, along with 9.9% mid-cap value and 3.2% small-cap value.
Of the 1,853 U.S.-listed ETFs with $2.01 trillion in assets under management, there are now 551 enhanced strategies or ETFs that do not follow traditional market capitalization-weight indices with $220.0 billion in assets, according to XTF data.
Investors are increasingly adopting smart- or strategic-beta ETFs as an alternative to traditional market capitalization-weighted index funds.
Smart-beta ETFs are considered a mix of both passive index-based offerings and actively managed styles. The enhanced, factor-based, smart-beta ETFs will passively track an underlying index. However, the underlying index implements actively managed strategies, such as focusing on low-volatility, momentum and value, among others.
Due to the different factor-based indexing methodologies, the nuanced differences in index construction can create different performance profiles among similar strategies. Consequently, investors should take the time to understand how efficiently a smart-beta fund’s underlying benchmark is at following targeted factors and whether other costs may be holding back performance. [Where Smart-Beta ETFs Fall On The Passive/Active Spectrum]
Financial advisors who are interested in learning more about smart-beta, fundamental indexing can register for the Wednesday, January 13 webcast here.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.