As the fixed-income ETF space begins to adopt smart beta or alternative index-based methodologies, bond investors should take the time to consider whether or not these strategies are right for their investment portfolios.

To help investors better select a smart beta bond ETF strategy, Alex Bryan, director of passive strategies for North America at Morningstar, outlined six steps investors should ask before buying any strategic-beta bond fund.

“There are no free lunches in the bond world–funds that consistently deliver market-beating returns almost certainly take greater risk. Risk is not necessarily bad. What’s important is that the fund is deliberate about the types of risks it takes, that it delivers its intended exposures in a cost-efficient manner, and that its approach to portfolio construction is grounded in sound economic rationale,” Bryan said.

For starters, potential investors should ask what is included in the fund’s investment universe. Bryan explained that this provides a rough idea of a strategy’s riskiness and potential role in a portfolio. An idea of the investment universe can also be a useful performance benchmark for the fund.

Investors should also know what factors the fund tries to target as smart beta funds typically screen for some type of market factor. The two most common approaches to strategic beta strategies are to target bonds that are cheap or high quality.

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