The Smartest Investors use Smart-Beta ETFs
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.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
