Smart beta or alternative index-based ETFs have grown increasingly popular among the investment community. As more look to this relatively new investment strategy, there are certain steps to consider before diving in.

Victory Capital Management in a recent research note outlined seven steps that investors should take to incorporate strategic beta products effectively into an overall investment portfolio.

First off, investors should consider their desired conclusion or investment outcome with a strategic beta product. If one doesn’t know why he or she is investing in an smart beta ETF, any allocation process may be doomed form the start.

Secondly, to achieve one’s desired goals, an investor should fully understand how the strategy is doing what it does. Investors should look deeper into the underlying index to garner a better understanding into how the smart beta indexing methodology differs from traditional market capitalization-weighting methodology. One should consider the factor tilts or potential sector biases that make the smart beta strategy stand out from the rest.

Investors should also look to see how intuitive is the methodology at hand. Looking beyond the science behind the strategy, one should keep in mind if the smart beta strategy actually makes sense as an investment theme.

If you have a smart beta strategy in mind, an investor should also look through the history of such a methodology. While there is no guarantee of future performances, an overview of historical data will help illustrate how the smart beta methodology is expected to work in various market environments. For instance, a low volatility strategy should exhibit lower levels of volatility in periods of wide market oscillations, or a fund that focuses on the size factor should lean toward smaller companies.

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