What’s the biggest trend in ETF land these days?
It’s called smart-beta ETFs.
These ETFs provide a twist on traditional indexed ETFs, and they’re an interesting alternative to traditional, market-cap-weighted index funds.
One of the most common types of smart-beta funds are those that offer equal weighting, meaning each stock counts the same in an index. Funds such as the Guggenheim S&P 500 Equal Weight ETF (RSP) invest in the same companies as the traditional market-cap-weighted S&P 500 index, but unlike the market-cap-weighted index, RSP doesn’t weight the likes of Apple or Microsoft more than smaller index components.
By equal weighting, the smaller-cap, lesser-known S&P 500 companies get treated the same as Apple, which now is the largest component of a market-cap-weighted S&P 500 fund.
Another type of smart-beta fund is one that siphons out volatility, such as the PowerShares Low Volatility ETF (SPLV). By holding the stocks with the least volatility in the S&P 500, this fund allows more conservative investors to sleep just a little bit better at night.
The popularity of smart-beta funds of late has really been a notable trend in the market. In fact, about 60% of capital flowing into ETFs during the past couple of years has gone into some sort of smart-beta fund.
That, my friends, is a smart trend that I think will continue for some time.
So, be smart: use smart-beta ETFs.