WHAT IS MARKET CAP?
The early years: Market cap-weighted indexing
The earliest ETFs tracked traditional market cap-weighted indexes and are still among the most commonly used today. At first, they invested mainly in large U.S. stocks but have since expanded to also cover international stocks, bonds and other asset classes.
What are they?
Market cap weighting is simply the process of building a portfolio based on company size. Bigger companies make up more of the portfolio, smaller companies make up less. The S&P 500 is a good example of a market cap-weighted index. ETFs tracking that index seek to earn very similar returns by investing in the same companies, in the same proportions.
Why do investors own them?
They offer an easy, low-cost way to “buy the entire market,” without deviating in any way from an index.
Market caps of companies in the S&P 500 index
WHAT ARE FACTORS?
Screening for stocks with the desired characteristics
The first evolution: Strategic beta ETFs
Like the first ETFs, strategic beta also tracks an index, but the index isn’t market cap-weighted and often represents a subset of a larger investment universe. The goal is to deliver higher returns and/or lower risks than traditional indexing.
What are they?
Strategic beta ETFs use criteria other than company size to determine portfolio holdings. Some weigh each stock equally. Some screen for stocks with specific characteristics, or “factors,” such as cheap prices, fast growth or low volatility. And some do both.
Why do investors own them?
Strategic beta ETFs use the efficiencies of index-based investing to reach more targeted areas of markets. Investors might choose them to pursue a specific goal, fill diversification gaps or capture short-term opportunities as they arise.
ACTIVE ETFs EXPAND INVESTOR CHOICES
The latest evolution: Actively managed ETFs
Active ETFs rely on people, rather than indexes, to build portfolios of stocks, bonds and other securities. The goal is to outperform a passive index over time.
What are they?
Professional managers oversee active ETFs, usually with support from a team of research analysts. Together, they study potential investments and choose only those considered most attractive.
Why do investors own them?
For some, active ETFs offer the best of both worlds – the easy trading and tax savings of an ETF, plus the experience and expertise of fund managers. This human element gives ETFs more flexibility in pursuing returns and managing risks. During volatile times, for example, managers can take defensive measures aimed at limiting losses versus an index.
Active ETFs: Capturing research insights and manager expertise
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investing involves risk, including possible loss of principal. Shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account and are not individually redeemed from the fund.
International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the U.S. and other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and decreased trading volume.
There is no guarantee the funds will meet their investment objective. Diversification may not protect against market loss. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve.