People should also know how the indexing methodology screens its factors. For example, a fund can use accounting data such as profit margins and leverage. To assess quality, one would look at something like credit spreads. Regardless of the metrics used, Bryan argued that the screens should be simple, transparent and clearly representative of the targeted investment style.

One should also be aware of how aggressively the fund will adhere to its factor strategy since those with more aggressive factor tilts have greater active risk or more room to both outperform and underperform. Bryan believed that tracking error relative to the fund’s starting universe benchmark is a good indicator for how much active risk a fund takes on since it shows how much the fund’s performance deviated from its benchmark opportunity set due to active bets.

Investors should be aware of potential portfolio constraints, which may limit risk and improve diversification. Bryan argued that constraints can prevent a value strategy from becoming too aggressive, or a quality fund from being overly conservative. The most common constraints include limits on turnover, tracking error, duration, credit risk, sector exposure and issuer weightings.

Lastly, investors should ask how much credit- and interest-rate risk the bond fund takes on. To gauge duration and credit risk, one can compare the average duration of the fund’s holdings, as well as the distribution of their credit ratings, to a benchmark. Yield is also another good indicator for risk.

For more information on alternative investment strategies, visit our smart beta category.