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DEFINITION of 'Intelligent ETF'

An exchange-traded fund (ETF) that employs an active investment strategy based on a broad index, such as the S&P 500 or a sector-based index. The fund may choose to exclude some stocks within the index while increasing or decreasing the percentage weighting of other stocks. Most intelligent ETFs carry higher expense ratios than standard ETFs, as well as substantially higher turnover ratios.

Also known as a "smart ETF."

BREAKING DOWN 'Intelligent ETF'

Many of these "intelligent" or "smart" ETFs originated in the aftermath of the 2000-2002 bear market. Most intelligent ETFs look to avoid market capitalization-weighted portfolios, instead using internal metrics (or black box systems), such as company fundamentals or share performance.

Any ETF or index fund that does not replicate a base index is not passive investing, meaning that the fund's returns could deviate markedly from the returns of the benchmark index. Some intelligent ETFs have internal or proprietary indexes that are merely replicated within the ETF, but this is still active investing, and many of the internal indexes cannot be readily examined.

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