Passive investing has also become closely associated with market-cap weighting, even though the two are not synonymous. Market-cap weighting simply allocates more to larger companies, allowing winners to grow into an increasingly larger share of the portfolio over time.
While this approach has proven highly successful, academic research has identified other characteristics, or factors, that have historically influenced long-term stock returns. Among the best known from MSCI are value, size, quality, high dividend, momentum and low volatility.
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These factors do not outperform all at once. Leadership rotates as market conditions change. Growth and momentum, for example, may dominate during periods of strong economic optimism, while value and low-volatility strategies have historically performed better during downturns.
Investors looking to tilt their portfolios toward one or more of these characteristics can now do so through a wide range of smart beta exchange-traded funds, or ETFs. Smart beta ETFs occupy a middle ground between traditional indexing and discretionary stock picking.
Smart beta ETFs follow rules-based methodologies that emphasize specific investment factors. Some are purely passive index strategies, while others use systematic active approaches, but all seek to improve upon a standard market-cap-weighted index benchmark in a disciplined, repeatable way.
That does not mean smart beta guarantees better results. Individual factors regularly fall in and out of favor, and many smart beta funds carry higher expense ratios than market-cap-weighted traditional index funds. Those costs can offset some of the potential benefits over time.
Here are seven of the best smart beta ETFs to buy now:
| ETF | Expense Ratio |
| Dimensional World Equity ETF (ticker: DFAW) | 0.24% |
| Avantis All Equity Markets ETF (AVGE) | 0.23% |
| iShares MSCI Global Min Vol Factor ETF (ACWV) | 0.20% |
| State Street SPDR Portfolio S&P 500 Value ETF (SPYV) | 0.04% |
| State Street SPDR Portfolio S&P 500 Growth ETF (SPYG) | 0.04% |
| Invesco S&P 500 Pure Value ETF (RPV) | 0.35% |
| Invesco S&P 500 Pure Growth ETF (RPG) | 0.35% |
Dimensional World Equity ETF (DFAW)
Factor investors do not have to sacrifice low costs and broad diversification, and DFAW delivers both. This ETF charges a competitive 0.24% expense ratio while providing exposure to thousands of U.S., developed international and emerging-market stocks. Over the trailing one-year period, DFAW returned 25.3%, outperforming the MSCI All Country World IMI Index’s 24.2% total return.
“DFAW is designed to place extra emphasis on the types of stocks that tend to outperform over time — smaller, lower-relative-price and higher-profitability companies,” explains Rob Harvey, co-head of product specialists and vice president at Dimensional Fund Advisors. “We believe that focusing on multiple premiums improves the reliability of outperformance over the market.”
Avantis All Equity Markets ETF (AVGE)
“Our equity portfolios tend to emphasize companies with higher cash profitability and that are trading at an attractive price-to-book ratio,” explains Matthew Dubin, portfolio manager at Avantis Investors. “These valuation metrics have been well documented in research as indicators of higher expected returns.” AVGE uses a similar fund-of-funds structure as DFAW to provide global factor exposure.
This ETF is also competitively priced at a 0.23% expense ratio and broadly diversified across thousands of stocks. “Our goal is to systemize active management and offer portfolios with all the advantages of indexing, such as broad diversification, low turnover, low expense ratios (and) high tax efficiency, but without its disadvantages,” says Daniel Ong, senior portfolio manager at Avantis Investors.
iShares MSCI Global Min Vol Factor ETF (ACWV)
Not every factor ETF is designed to outperform the market. Some, like ACWV, appeal to risk-conscious investors seeking to reduce portfolio drawdowns. ACWV tracks the MSCI All Country World Minimum Volatility Index, which uses an optimization process that considers both the volatility of individual stocks and the correlations between them to construct a portfolio of approximately 380 holdings.
The goal for ACWV is to create a lower-volatility portfolio in the aggregate, and historically, the ETF has achieved that objective. Over the trailing three-year period, ACWV has posted a standard deviation of 8.3% and an equity beta of 0.38, making it substantially less volatile than the market-cap-weighted MSCI All Country World Index. The ETF also carries a competitive 0.2% expense ratio.
[Read: 7 Best ETFs to Buy Now.]
State Street SPDR Portfolio S&P 500 Value ETF (SPYV)
Investors seeking U.S. rather than global exposure can still incorporate factor investing into their portfolios. One of the simplest approaches is to use factor indexes built from familiar benchmarks such as the S&P 500. For example, investors who appreciate the S&P 500 but want less exposure to today’s technology concentration may prefer SPYV, which is very affordable at a 0.04% expense ratio.
The ETF screens S&P 500 constituents using valuation metrics including price-to-book, price-to-earnings and price-to-sales ratios. “SPYV allows investors to take a specific ‘style beta’ bias, without deviating too much from the broader market-cap weights,” explains Matthew Bartolini, managing director and global head of research strategists at State Street Investment Management.
State Street SPDR Portfolio S&P 500 Growth ETF (SPYG)
One of the defining characteristics of factor investing is that leadership tends to rotate over time. Over much of the past decade, growth stocks have outperformed value, but historically the two have traded leadership back and forth rather than one permanently dominating the other. As a result, investors can meaningfully influence performance by deciding which factor they want greater exposure toward.
SPYG represents the opposite end of the spectrum from SPYV. While it also selects its holdings from the S&P 500 and charges the same low 0.04% expense ratio, it screens companies based on factors including sales growth, earnings change-to-price ratio and momentum. Compared to SPYV, SPYG has a more top-heavy portfolio with greater concentration in the technology and communication sectors.
Invesco S&P 500 Pure Value ETF (RPV)
The S&P 500 factor indexes tracked by SPYV and SPYG are designed to provide relatively modest tilts toward value and growth stocks. Because constituents remain market-cap weighted, their performance generally stays closer to the broader S&P 500. Investors seeking a stronger factor tilt, however, may prefer RPV, which offers a much purer expression of value within the S&P 500.
“Unlike first-generation value ETFs, which remain heavily influenced by market-cap weighting and often retain significant exposure to large growth-oriented names, RPV emphasizes stocks with the strongest value attributes,” explains Chris Dahlin, senior factor and core equity ETF strategist at Invesco. RPV is more concentrated than SPYV, with only 120 holdings, and pricier, with a 0.35% expense ratio.
Invesco S&P 500 Pure Growth ETF (RPG)
“RPG provides more concentrated and targeted exposure by weighting holdings based on their growth characteristics rather than market capitalization, resulting in a purer expression of the factor,” Dahlin says. “Returns are driven more by factor characteristics and less by the performance of the largest companies in the index.” RPG charges the same 0.35% expense ratio as RPV.
Compared with SPYG, RPG provides a much more concentrated growth portfolio, holding just 67 stocks, half as many as its counterpart. Even so, the portfolio continues to exhibit strong fundamentals, including a 34.2% return on equity, while maintaining a mega-cap tilt with an average market capitalization of $442 billion. Technology remains the largest sector allocation, at 48%.
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7 Smart Beta ETFs to Buy Now originally appeared on usnews.com
Update 07/13/26: This story was published at an earlier date and has been updated with new information.
