Smart beta ETFs have gained popularity among investors who are seeking alternative ways to access the equities market and diversify a traditional portfolio mix.

“Traditionally, smart beta almost means anything that isn’t market-cap weighted – some weighting scheme that takes you away from that standard approach,” Luke Oliver, Head of Investing, Americas, DWS,

“It’s kind of evolved. To me, more specifically, you take lots of tried-and-true strategies, like low volatility, small-caps, momentum, and you apply those to a portfolio to give you something like a quasi-intelligent way of picking stocks while still remaining passive,” he added.

DWS offers a Comprehensive Factor ETF suite, including Xtrackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), Xtrackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF), Xtrackers Russell 2000 Comprehensive Factor ETF (NYSEArca: DESC) and Xtrackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG). The X-trackers multi-factor suite selects components based on a broader five factors, including quality, value, momentum, low volatility and size.

For buy-and-hold investors, multi-factor investments help combine uncorrelated investment styles to smooth out volatility. Since there are multiple uncorrelated factors at play, it helps guarantee that at least one factor will help support the portfolio during times of distress. Moreover, a multi-factor ETF removes the need for investors to babysit a portfolio and switch between factors in an attempt to time market moves.

The quality factor helps hone in on the quality of a company earnings as a better gauge of future earnings performance. The underlying indices may provide a quantifiable measure of each company’s profitability, efficiency, earnings quality and leverage.

The value factor reflects the idea that cheaper equities are thought to outperform more expensive stocks over the long-term. Consequently, the underlying indices will focus on cash-flow yield, earnings yield and sales-to-price of each company as measures of value.

Momentum may reflect the recent price movements over time as an indicator of future stock price movements. Specifically, the underlying indices review the 11-month cumulative total returns of each stock.

Low volatility suggests that portfolios with less volatility or low beta can provide higher-than-average return with smaller drawdowns. The underling indices will calculate the standard deviation of five years of weekly total local returns for each stock.

Lastly, the size factor reflects the historical long-term effect that show long-term outperformance in small-caps over large-caps. The underlying indices will select companies based on full market capitalization.

For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.