Hot 'Smart Beta' ETFs

April 08, 2014

Here are some noncap-weighted funds that are outperforming.

Market Intel - Hot Smart Beta ETF Strategies

The term "smart beta" has taken the ETF industry by storm. Unfortunately, the term lacks a clear definition; some say it amounts to little more than a slick marketing term. We can conclude generally, however, that the term excludes plain-vanilla funds that select and weight their constituents by market capitalization.

These are some of the hottest non-vanilla ETF strategies as described by either their weighting or selection methodology:

  • Equal-Weighting: This simple methodology weights all index constituents equally and, consequently, favors the smallest companies at the expense of the largest. With a small-cap tilt, these strategies tend to outperform in rising markets and underperform when they fall. The SPDR S&P Pharmaceuticals ETF (XPH | A-42) gained 47 percent over the past year, while our benchmark for U.S. pharmaceuticals gained only 21 percent.
  • Fundamental: Fundamental indexes come in a variety of shapes and sizes but, in general, the methodology uses information from a firm's financial statements to make selection and/or weighting decisions. In this case, the Guggenheim S&P SmallCap 600 Pure Value ETF (RZV | B-50) tracks an index that uses three fundamental ratios to make selection and weighting decisions: price to book, price to earnings, and price to sales. RZV is up 37 percent over the past year, while our U.S. Small Cap Value segment benchmark is up only 23 percent.
  • Revenue: Selecting and/or weighting constituents by revenue technically falls under the "fundamental" umbrella, but the strategy is popular enough to hold out on its own. In this case, the RevenueShares Small Cap ETF (RWJ | B-78), which weights its holdings by revenue, has gained 37 percent over the past year, while our benchmark for U.S. small-caps gained 27 percent.
  • High Beta: Understandably, these strategies are prone to big swings up and down. Recently they've been a hit, as the PowerShares S&P International Developed High Beta ETF (IDHB | D-28) and the PowerShares S&P 500 High Beta ETF (SPHB | A-41) returned 35 and 36 percent, respectively.
  • Multifactor: These are funds that select their portfolio using both technical and fundamental factors. It can encompass a broad range of strategies and, as such, these funds are best assessed on a case-by-case basis. Some of the funds in First Trust's AlphaDex suite are among the most popular for this category, including the First Trust Switzerland AlphaDex ETF (FSZ | D-29), the First Trust Consumer Staples AlphaDEX ETF (FXG | B-52), and the First Trust Industrials AlphaDex ETF (FXR | B-62), each of which outperformed our respective benchmarks by roughly 10 percent.
  • Momentum: The funds select their holdings based on recent price movements. The RBS Gold TrendPilot ETN (TBAR | B-40) is one such fund: TBAR switches exposure between Treasurys and gold depending on whether the price of gold is above its 200-day moving average for at least five-consecutive days. The fund is down 4 percent over the past year, which would be unimpressive if gold weren't down 18 percent over the same period.

Find your next ETF

Reset All