The big advantage of smart beta funds over active managers is cost. About 66 percent of smart beta ETFs have a management fee of less than 40 basis points, Johnson said.
That's significantly more than most market-weighted index funds, but significantly less than the 0.93 percent that the average active manager of a large-cap equity fund charges annually. "Some one-third of these funds have fees over 0.4 percent," said Johnson. "Regardless of the strategy, you want to make sure it's investable at a low cost."
On Sept. 17, Goldman Sachs Asset Management entered the smart beta market, launching the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index with a 0.9 percent net expense ratio, compared to 0.38 percent for the average smart beta ETF.
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Like all good ideas on Wall Street, however, smart beta funds are being marketed to death.
There are thousands of factors and combinations of factors that might arguably generate investment returns better than the market, but very few of them have track records that can support the claim. While back-testing of a rules-based strategy might look great, there's no guarantee on future performance.
"Some product providers saw smart beta as a new way to extract higher fees," said Research Affiliates' Hsu, whose firm began licensing its fundamentally weighted index products to companies such as PowerShares, Pimco and Schwab in the mid-2000s.
"They add bells and whistles to the product to differentiate themselves and make it harder for investors to understand the strategy," Hsu said.