Exchange-traded funds (ETFs) account for almost 25% of total net assets of globally regulated open-end funds, which is not bad for an asset class that only came into existence 25 years ago. Now they’re all the rage in most of the world, mainly due to their low cost and the fact that, perhaps counterintuitively, they tend to frequently beat their actively managed counterparts. The global ETF industry continues to innovate and one of its current offerings is the smart beta ETF, which contains an element of active management while still conforming to the basic tenets of passive asset management. Smart beta defines a set of investment strategies that emphasise the use of alternative index construction rules to the traditional market capitalisation-based indices. So, for example, an index could be constructed that just contains small cap stocks, and the ETF would track that index. This is a very simple example of how smart beta works. Regarding the traditional ETFs, a major advantage of ...

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