In crafting JHSC’s underlying index, Dimensional “looked to eliminate the lowest profitable and most expensive stocks in the small-cap space, because history will show holding those stocks will actually decrease the value of the small-cap premium,” Deroian said, referring to the long-term premium or outperformance found in small-cap stocks over their larger peers.

The smart-beta ETF follow a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying index may overweight stocks with lower relative prices and underweight names with higher relative prices. The index can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.

The resulting portfolio is one that may help investors achieve better returns over the long haul.

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