Smart beta ETFs that follow alternative indexing methodologies help combine the best of actively managed investments with the efficiency and low-cost of passive index-based strategies.

“We start with a multi-factor model that basically bridges the gap between active and passive management,” Marc Chaikin, Founder and CEO for Chaikin Analytics, said at the Inside ETFs 2018 conference. “So we saw one of the problems advisors are confronted with every day, ‘do I go with active managers or passive products?’ The multi-factor approach we’ve taken to creating indices basically bridges the gap between active and passive.”

Smart beta ETFs, like traditional passive funds, passively reflect the performance of an underlying index. However, the new breed of smart beta ETFs track a rules-based indexing methodology that is reminiscent of the actively managed investment approach that tries to exploit profitable positioning.

The strategies are designed to take advantage of inefficiencies created by traditional market capitalization-weighted indices. One approach used by smart beta ETFs centers on investment factors, which try to contribute to the potential outperformance of a broad index while maintaining its passive indexing methodology.

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