WHAT should you INVEST in? Traditional ETFs vs Smart Beta ETFs HDFC Securities

Smart Beta ETF offers the best of both worlds by adding an active element to a traditional passive ETF. A traditional vanilla ETF follows an index where the allocation is purely on the market capitalisation weightage. A smart beta ETF, on the other hand, assigns factors to select stocks from the index or underlying that it tracks. A smart beta ETF that tracks an Index may not replicate all the stocks based on market capitalisation instead will assign factors to select stocks. The factors or parameters can be financial, technical or volatility based. The stock selection and fund allocation strategy can be based on factors or metrics like dividend growth, volatility, momentum, low debt-equity ratio, quality of earnings, higher return on equity (ROE/ROCE) etc.
The idea of having a smart beta ETF is to improve or outperform the traditional ETF and create alpha with lower risk. Smart beta ETFs are customised and employ one or more parameters for stock selection from the underlying traditional ETFs it is going to track. Smart beta ETFs have typically lower expense ratios than actively managed funds. However, it can be expensive than the traditional ETFs as the stocks may be bought and sold to meet the fund guidelines. It can also underperform as it churns stocks out instead of the more stable buy and holds traditional ETFs. In general, ETFs run the risk of impact cost due to wide bid-ask spread due to thin trading volumes and Smart Beta ETF is no exception. It is suitable for investors who want a return better than an index and understand their risk profile.
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What should you invest in?: Traditional ETFs vs Smart Beta ETFs HDFC Securities

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