ETFs 101: What is Enhanced Indexing?

As exchange traded fund (ETF) products expand beyond the simple market-cap indexing methodologies, fund providers have created a new breed of “smart” or “intelligent” investments products that strive to reflect customized, strategy-based Indices.

The original rules-based ETFs screened for high-dividend stocks, based on technical analysis and weighted companies by fundamental factors like earnings or valuations. The equal-weighting methodology may arguably be a form of enhanced indexing, as well.

Additionally, Rob Arnott’s fundamental indexing methodology have been successfully implemented into some Invesco PowerShares ETFs.

Now, there is a growing subset of ETFs that offer strategy-based methodology that mimic active management but passively reflect hand-tailored indices that screen for specific qualities in an attempt to beat the market.

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