Smart Beta Mutual Funds vs. Smart Beta ETFs

Smart beta mutual funds and ETFs attempt to capture enhanced returns with reduced risk via diversification. This isn’t your traditional form of diversification. Instead of being weighted by size or other traditional passive index factors, most smart beta funds are weighted on specific characteristics, such as value, growth, dividend growth, momentum, low volatility or high quality. Smart beta index fund managers seek to replicate these focused indexes which use customized screening methodologies to filter stocks. Turnover is generally low as the indexes typically rebalance semi-annually or annually cutting expense ratios. Across the industry these funds are a factor in the ongoing debate of active versus passive as they offer many advantages of customized stock picking with lower expenses.

One of the big differences in smart beta mutual funds versus ETFs is that very few mutual funds exist for retail investment. Most of the smart beta mutual funds in the market are structured for investment by institutional investors and fall more in the enhanced, active smart beta category. As such the majority of innovation around smart beta has been channeled toward ETF structures. Below we take a look at a few examples.


PIMCO RAE Fundamental PLUS (PXTIX) and DoubleLine Shiller Enhanced CAPE I (DSEEX) are two popular smart beta mutual funds.


PIMCO RAE Fundamental PLUS (PXTIX) seeks the total return of the S&P 500 complemented with an absolute bond alpha strategy. It has a one year total return of 7.15%. The dividend yield is 4.44%. Its expense ratio is 85 basis points.

DoubleLine Shiller Enhanced CAPE (DSEEX)

DoubleLine Shiller Enhanced CAPE (DSEEX) seeks total return in excess of the Shiller Barclays CAPE U.S. Sector Total Return Index. A risk here is that the fund will invest up to 5% of net assets in defaulted corporate securities.

The fund has a one year total return of 8.25%. The dividend yield is 2.19%. The expense ratio is 54 basis points. The minimum investment is $100,000, but that drops down to $5,000 for an IRA.


Smart Beta ETFs: An Overview

EXCHANGE-TRADED FUNDS provides a comprehensive list of smart beta ETFs with 600 as of November 2022.

Invesco DWA Healthcare Momentum ETF (PTH)

The Invesco DWA Healthcare Momentum ETF (PTH) is one of the best performing smart beta ETFs on a one-year basis through October 24, 2018. The ETF seeks to track the holdings and return of the Dorsey Wright® Healthcare Technical Leaders Index which is sponsored by Nasdaq Inc. The Index uses a smart beta methodology to select 30 securities with strength characteristics using a customized screening methodology. The ETF is part of a series which seeks to identify strength and momentum characteristics across U.S. sectors.

PTH trades at approximately $81. It has a one-year return of 24%, outperforming the S&P 500’s return of 8.78%. Assets under management for the fund are $289 million. The ETF’s expense ratio is 60 basis points.


The world of smart beta is evolving as many companies innovate and launch new funds with both ETF and mutual fund structures. Through October 2018, the interest from investors in smart beta strategies for core holdings is evident from the strategy’s top five funds by assets under management:

  • QUAL           iShares Edge MSCI USA Quality Factor ETF                         
  • SCHG          Schwab U.S. Large-Cap Growth ETF                                       
  • IJT                iShares S&P SmallCap 600 Growth ETF                                 
  • HDV             iShares Core High Dividend ETF Equity        
  • IJS                iShares S&P SmallCap 600 Value ETF

Investments in smart beta by Blackrock and Vanguard are also showing the worthiness of the strategy’s attention. According to a November 2017 report from the Financial Times, Blackrock and Vanguard are leading the smart beta fund development as the only two asset managers with over $100 billion in smart beta. The investment by BlackRock and Vanguard are also testaments to the attractiveness of the category. As such, expanding search due diligence to be sure and include some smart beta options when exploring a new market allocation is becoming increasingly importing for optimizing portfolio return.

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