This could be a better way to invest: Expert
With investors seeking out new ways to get better returns, so-called smart beta exchange-traded funds are becoming more popular. The reason is a practical one, Dan Draper, Invesco PowerShares managing director, told CNBC on Monday.
"If you really look over the last 15 years, [there have been] unintended consequences," Draper said in an interview with " Power Lunch " from the Inside ETFs conference.
"If you look at the dotcom bubble, you had your tech exposure would have gone from 19 to 31 percent in a year. If you look at Japan bubble, you would have doubled your exposure in a global equity portfolio in Japan over three years. Basically when those markets crash, you really get hurt."
In other words, smart beta funds are not market-cap weighted and therefore they are not overweighted with names that may be overvalued.
For example, PowerShares offers an ETF that is comprised of high-dividend stocks (NYSE Arca: PFM) and another that it calls "equal weight (NYSE Arca: EQAL)," which takes equal sector weightings and equal weightings of each stock.
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PowerShares' low volatility fund (NYSE Arca: SPLV), which tracks the 100 least volatile stocks in the S&P 500 (^GSPC), has also been a big winner for the firm, he said.
Another alternative to traditional investing is letting machines manage portfolios rather than people. It's a popular path for the younger generation, Wealthfront CEO Adam Nash said.
That's because millennial investors are cynical about promises of financial advisors and are more comfortable relying on technology for their investments, he explained to " Street Signs ."
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"For folks who have grown up with technology, there are certain things they trust software to do," Nash said in an interview from the Inside ETFs conference.
"For example, Wealthfront monitors your account 2/47, 365 days a year. That's something you just can't expect a human to do."
Wealthfront, No. 20 on CNBC's Disruptor 50 list, is a financial firm that uses automation to create portfolios of low-cost exchange-traded funds. Nash said that about 60 percent of its clients are under 35 and 90 percent are under 50.
The secular trend toward passive investing is in part due to the attitude of millennials, he said. However, that doesn't mean humans aren't involved in the process.
'We just use our humans for what we think humans do well, which is the investment research," Nash said. "They put together the right portfolios. Software is used to make sure that your account is personally taken care of on a daily basis."
