Smart beta exchange-traded funds are emerging as a popular option for some investors who are seeking a strategy to diversify their portfolio without relying on the standard index funds which focus only on stock or sector concentration.
Typical index funds are weighted by market cap and the indices will overweight the largest stocks.
Smart beta ETFs provide a lower risk, greater tax efficiency and give investors more flexibility to trade in and out of them compared to standard mutual funds.
These products represent a "middle ground on the active-to-passive spectrum—they deviate from a traditional, strictly passive market portfolio, but do so in a rules-based, transparent, and relatively low-cost manner," according to a report by Morningstar, a Chicago-based independent investment research provider.
Here are five reasons why investing in smart beta ETFs can be advantageous.