Wall Street loves a good marketing technique. It lets the industry sell products to unsuspecting investors that they probably don’t need.
Essentially, smart beta funds use various fundamental screens — searching for factors like sales, earnings, book value, dividends or cash flows — to create or improve upon traditional indices. The hope is that by focusing on these factors, the new smart beta funds will ultimately outperform market cap-weighted funds like the SPDR S&P 500 ETF (SPY).
Here’s the rub, though: Not all smart beta products are going to be “smart.”
In the rush to get investors to bite on some of these things, Wall Street has been issuing smart beta funds like crazy — many with more and more complex underlying index requirements — to the point where the sector is starting to look like a potential minefield. When you start to look at too many factors, you begin to really resemble active management. (And we know just how great most active managers are when it comes to returns.)
To be honest, most smart beta products are going to fall flat in terms of their goals. But not all of them will be dogs. Here are five of the best smart beta funds to compliment your index funds.