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Smart-Beta ETFs: Active Styles in a Passive Investment


The new breed of smart-beta, index-based exchange traded funds are encroaching on traditional beta-index fund’s market space as more investors look to alternative index strategies to supplement or even replace core investment positions.

Fund sponsors are touting the new line of smart-beta index ETFs’ ability to screen for specific market factors that allow investors to take a more customized approach to the marketplace.

“What we think the opportunity is, is to use these products strategically,” David Mazza, head of research for SSgA’s SPDR ETF and mutual fund businesses, said in a Financial Times article.

State Street recently launched nine ETFs based on MSCI Qualty Mix indices that screen for quality, value and low-volatility factors. [What SSgA’s New Multi-Factor Index ETFs Are All About]

“What you get when you bring these three [factors] together is diversification because they don’t always correlate with each other,” Mazza added.

JPMorgan recently listed its first ETF, JPMorgan Diversified Return Global Equity ETF (JPGE) , which selects stocks based on valuation, momentum, volatility and size factors. [JPMorgan to List First ETF Tuesday]

Essentially, the new line of smart-beta ETFs provides a good middle ground between traditional beta-index funds and active products, incorporating active strategies within a benchmark index.

“As you move into the realm of multi-factor strategic beta, you’re starting to combine them in a manner that has performance attributes similar to traditional active management,” Ben Johnson, director of passive fund research at Morningstar, said in the article.

Additionally, with some factor-based index ETFs posting longer track records. More advisors are beginning to add these smart-beta ETFs in strategic, core positions.

“What you end up seeing with the fundamental strategies is that the longer the time horizon, the higher the frequency for excess return,” John Feyerer, vice-president of product strategy and research at PowerShares, said in the article. “We clearly position this as a core holding.”

For more information on ETF indices, visit our indexing category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.