The U.S. bull market rally is continuing on its ninth year, but some are growing concerned over high-flying large-caps taking up bigger weights in traditional beta-index exposure. Alternatively, investors may consider smart beta, large-cap exchange traded funds that try to focus on factors that could limit risks and still provide exposure to upside potential.
The so-called smart beta, enhanced, strategic beta, alternative or factor-based index ETFs all follow a similar theme where the underlying indices eschew conventional market capitalization-weighted methodologies for customized or rules-based allocations, tracking a range of strategies from equally weighting stocks to identifying momentum across different corners of the market, among many others. What ties the theme together is the ability to add exposure to specific factors found in traditionally active managed funds.
There are now hundreds of smart beta or factor-based strategies available, ranging from minor tweaks on existing broad-based indices to more customized options that capture returns from specific styles or asset categories.
For instance, the PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF), which has been around since December 19, 2005, ranks among the longest running multi-factor, smart-beta ETFs in the U.S. markets. PRF tracks 1,000 U.S. stocks that show the highest fundamental strength based on the RAFI fundamental indexing methodology, which screens for sales, book value, cash flow and dividends.