By Xavier BrennerSmart beta strategies have caught on with investors, with more than 450 US-listed smart beta products in the market with some $510 billion in assets, according to investment research firm Morningstar. Smart beta ETFs are carefully constructed indexes that rank stocks by traits other than their market value, the standard methodology employed by traditional benchmarks, such as the Standard & Poor's 500. Instead, these products focus on "factors," such as growth, value, dividends, volatility or other financial metrics that offer the possibility of market-beating performance and reduced portfolio risk.Like any other financial product, however, investors need to carefully weigh the pros and cons. Here are some questions you ought to be asking:
What's the underlying strategy?
Some smart beta indices are pretty straightforward, but others are based on complex methodologies. Index components can be weighted by companies’ revenues, dividends, volatility or other corporate variables and skew toward small caps or large caps. Read the prospectus, check out the provider's website and consult an investment professional, if need be, to make sure you're adequately informed before diving in.
How much does this smart beta strategy cost?
Investment firms are quick to point out smart beta strategies are typically less expensive than actively-managed funds. That said, they generally cost more than passive, market-cap-weighted indices.