Smart beta exchange traded funds have quickly grown in popularity. As more investors incorporate these strategies into their investment portfolios, it is important look under the hood and differentiate one smart beta ETF from another.
Like most other ETFs, smart beta ETFs are passive in nature, passively reflecting the performance of an underlying index. However, unlike traditional beta-index funds that adhere to market capitalization weighting methodologies, smart beta ETFs follow rules-based indices that screen for specific factors, similar to how active managers pick and choose their own securities.
Consequently, potential investors should take the time to consider the differences between prospective smart beta ETF investments.
For starters, there are a number of smart beta ETFs that only screen for a single investment factor. For example, the iShares Russell 1000 Growth ETF (NYSEArca: IWF) and iShares Russell 1000 Value ETF (NYSEArca: IWD) may be considered the simplest form of smart beta as they specifically screen for growth or value stocks, respectively.