A smart beta exchange traded fund strategy stood out the past week as investors who were seeking to capitalize on the renewed confidence for riskier assets looked to diversify their portfolios with an alternative take on the U.S. markets.

The Invesco Russell 1000 Dynamic Multifactor ETF (Cboe: OMFL) was the most popular ETF play of the past week, attracting over $700 million in net inflows, according to ETFdb data.

On the other hand, traditional stock ETF plays, like the SPDR S&P 500 ETF (NYSEARCA: SPY) and iShares Core S&P 500 ETF (NYSEARCA: IVV) were among the most disliked ETFs of the past week, experiencing $1.6 billion and $6.5 billion in net outflows, respectively.

The divergence in flows suggests that while some investors are engaging in the age-old tradition of profit taking in light of a record run in U.S. equities, some have taken the opportunity to shift into factor-based or smart beta stock ETFs to capture further upside and limit potential risks in a prolonged bull run.

Most style indices such as the popular SPY and IVV are market-cap weighted and concentrated by sector and to individual stocks. The market cap-weighted indexing methodology also makes these funds more top heavy with the best performers typically taking up the largest positions in the portfolio.

Alternatively, factors found in smart beta ETF strategies could provide investors with a multi-dimensional view of the market and allow for more precise targeting of specific drivers of risk and return.

Specifically, the Invesco Russell 1000 Dynamic Multifactor ETF tries to reflect the performance of the Russell 1000 OFI Dynamic Multifactor Index, which uses a rules-based approach that re-weights large-cap securities of the Russell 1000 Index according to economic cycles and market conditions, reflected by expansion, slowdown, contraction or recovery.

The securities are assigned a multi-factor score taken from five investment styles, including value, momentum, quality, low volatility and size. These various factors have exhibited specific characteristics that allowed them to outperform their peers.

For example, low volatility include stocks that exhibit lower volatility tend to perform better than stocks with higher volatility. Momentum refers to stocks that rise or fall in price and tend to continue rising or falling. Value covers stocks that appear cheap and tend to perform better than stocks that appear expensive. Quality or higher quality companies tend to perform better than lower quality companies. Size or smaller companies tend to perform better than larger companies. Lastly, yield or higher yielding stocks tend to perform better than stocks with lower yields.

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

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