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ETF Awards: Best, Worst and What to Watch in 2014

By Eric Balchunas - 2013-12-19T16:50:25Z

Photograph by Shawn Baldwin/Bloomberg

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What to Watch in 2014

How Smart is ‘Smart Beta’?

“Smart beta” ETFs, which had a breakout year in 2013 in performance and inflows, are funds that aren’t linked to traditionally designed indexes. While indexes like the S&P 500 weight stock holdings by market capitalization, smart-beta ETFs use fundamentals or dividends. Some smart-beta funds, like the Guggenheim Equal Weight S&P 500 ETF (RSP), give every stock an equal weight regardless of its market cap. In RSP’s case, that gives more voice to smaller large caps. 

Thus, in a year when smaller-cap stocks went on a tear, RSP beat the S&P 500 Trust (SPY) by 3 percentage points. If that reverses in 2014, will this strategy be considered dumb? This is why the term “smart beta” is misleading. “Strategic beta” is more like it.