Furthermore, Pollackov pointed out that these smart beta indexing methodologies are much more dynamic or more free to adapt to changing market conditions. During the financial crisis when financials were taking a beating, some smart beta or fundamental index-based ETFs were able to rebalance and reconstitute holdings to diminish exposure to some of the less attractive areas of the market to reduce downside risk.

Through instances like the financial crisis and other changing market environments, investors may find that smart beta indexing methodologies more closely mirror actively managed investment styles that are able to more freely adapt to changing conditions. However, smart beta ETFs are still passive in nature but their indexing methodology follows a strict rules-based strategy to minimize potential losses and still capture any upside potential.

“You saw exactly what happened in our U.S. fundamental products is where we actually started to scoop up by rule – not by active management but by rule – we started to take on a lot of those financials and it outperformed the index quite well,” Pollackov said, explaining how fundamental indexing picked up some of the most oversold areas as a way to play on cheap valuations following the financial crisis.

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