A. Not always.
As we have described before, smart-beta funds are a hybrid of actively managed funds and passively managed index funds. Smart-beta funds is a fast growing category, as of now there are more than 450 of these products with more to come.
Advantages of Smart-beta Funds
Compared with actively managed funds, smart-beta funds offer much lower fees. The trend is smart-beta funds' fees could be comparable to low cost index ETF funds' fees.
Compared with passively managed index funds, smart-beta funds try to beat the benchmark indexes by selecting stocks based on factors other than market value.
For example, while SPDR S&P 500 (SPY) gives the greatest weight to the largest company, a smart-beta fund could give its greatest weight to a company with the best historical risk-adjusted price return (e.g. iShares MSCI USA Momentum Factor MTUM).
Disadvantages of Smart-beta Funds
Different smart-beta funds might employ different weight factors, which makes them more like actively managed funds, the only difference is investors now would be speculating on which factors (vs. which stocks as in the active funds case) would outperform the benchmarks.
This speculative strategy will inevitably bring varied results. For example, while iShares MSCI USA Momentum Factors (MTUM) and Guggenheim S&P 500 Pure Growth (RPG) have outperformed their underlying benchmarks, iShares MSCI USA Value Factor (VLUE) and Vanguard Dividend Appreciation (VIG) have been underperformers.
The Bottom Line
A smart-beta ETF's performance is determiend by its employed strategy, which could be in or out of favor from time to time. A prudent investor could treat smart-beta ETFs as part of the portfolio, not the portfolio.