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The Rise of Smart Beta ETFs to Enhance Returns, Reduce Risks

This article was originally published on ETFTrends.com.

ETFs have grown up on traditional beta-index products, but now, a growing group of investors and advisors are looking for more. Consequently, the industry has come out with alternative investments based on customized indices, or smart beta ETF strategies.

"I think what you're seeing is people looking not just to replicate an index but outperform. You have some drivers and some ability to help perform. If you want to differentiate yourself form advisor A from advisor B, how do you do that? Well you can do it in the services you offer but you can also be the products that you put into your portfolios to potentially generate more alpha for a client over the long term," said Ed Rosenberg, Senior Vice President, Head of ETFs, for American Century, at the Charles Schwab IMPACT 2018 conference.

For example, American Century has also stepped into the smart beta or factor-based index ETF space with strategies including the American Century Quality Diversified International ETF (QINT) , American Century STOXX U.S. Quality Growth ETF (QGRO) and American Century STOXX U.S. Quality Value ETF (VALQ) .

The smart beta ETFs utilize American Century Investments’ Intelligent Beta methodology, which systematizes many of the same attributes that fundamental research and security selection seek to identify, in a rules-based, indexed approach.

QINT is a foreign large blend fund that seeks to enhance core international exposure. Its rules-based approach analyzes each stock’s quality, growth and value characteristics to select individual securities. It also dynamically adjusts exposures in an effort to take advantage of prevailing market conditions.

QGRO is a large-cap growth fund that seeks to enhance the core growth component of investor portfolios. The fund features a rules-based approach to identify stocks that feature a combination of quality and growth. The methodology distinguishes between stable growth and pure growth companies, dynamically allocating to each category and adjusting sector exposures, depending on the market environment.

VALQ tries to reflect the performance of the iSTOXX American Century USA Quality Value Index, which is made up of 900 largest publicly traded U.S. equity securities screened and weighted by fundamental measures of quality, value and income.

"What we're doing is we're trying to capture the fundamental approach of what a true asset manager does and put it into an ETF format. And that format so far in the equity space been a systematic approach. We call it 'intelligent beta,'" Rosenberg said.

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

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