By: Dividend Sensei
Think of them as a hybrid of a passive fund and an actively managed one. Active funds often charge between 0.5% to 1% expense ratios for a fund manager to pick stocks for you. However those higher fees and the fact that most active funds “shadow index” the S&P 500 means that 95% of them can’t beat the market over time. On the other hand smart beta ETFs are a rules based approach in which the ETF basically creates a proprietary index of higher quality stocks based on time tested market beating metrics that it then passively tracks, at much lower cost.
Just remember that factor investing isn’t a magic bullet, meaning a quick and guaranteed road to riches. You still need to follow the same long-term strategy as with passive ETFs, meaning dollar cost averaging, (always be investing), and don’t panic sell during a correction. But if you can maintain that discipline, then smart beta ETFs might be able to help boost your returns by 1% to 2% a year over those of the broader market. Over a long enough period of time that might be the difference between retiring in comfort and not retiring at all.