Now that there are multiple ETFs each tracking North America’s major indexes, ETF providers begun to differentiate themselves by offering so-called “smart beta” products.
The concept is simple. These ETFs use rules that go beyond just following a traditional index. Indexes tend to be cap weighted, giving larger stocks a bigger weighting. Smart beta ETFs look at other factors and then build a better portfolio.
One simple example is S&P 500 ETFs. Most will simply track the index. But there’s an alternate version that takes an equally-weighted position in all 500 companies.
This ETF – the Guggenheim S&P 500 Equal Weight ETF (NYSE:RSP) – has outperformed the S&P 500 over the last five and 10 years.
Canada also has several smart beta ETFs. Let’s take a closer look at the First Asset Morningstar Canada Value ETF (TSX:FXM).
The ETF seeks to invest in companies which qualify as traditional value investments. It’s looking for low P/E ratios and companies trading at a low price-to-book value. It holds 30 different stocks, each with a weighting between 3.7% and 2.2%.
Top holdings include George Weston, Cogeco Communications, and Loblaw Companies.
Results have been rock solid. Total returns since inception have been 9.55% annually, crushing the benchmark, which has only retuned 7.69%. The fund is just over five years old. $10,000 invested in FXM on inception date would be worth approximately $16,000 today.
In 2016, the fund returned just over $0.26 per share back to unitholders, giving it a trailing yield of 1.82%. It has a management fee of 0.60%.
