3 smart beta ETFs for investors looking to beat the market

Investing in ETFs is a quick and relatively inexpensive way for new investors to get exposure to the stock market. But for those who aren't so keen to track broad market indexes, smart-beta ETFs may offer many of the benefits of active management but at substantially lower costs.

Unlike most traditional ETFs, which are typically passive funds that follow popular stock market indexes such as the FTSE 100 and the S&P 500, smart-beta ETFs follow a different kind of index, in which stock weights are not purely dependent on market capitalisation. Instead, stock weights depend on other factors, such as volatility, momentum, value or dividend history. And as such, smart beta ETFs target shares with characteristics shown to beat the market in the long term.

Minimum volatility

In the low volatility space, there's the iShares Edge MSCI World Minimum Volatility UCITS ETF(LSE: MVOL). The fund aims to provide investors diversified exposure to developed companies, while seeking to minimise the market's ups and downs.

It tracks the performance of a selected portfolio of shares, which on aggregate, has lower volatility characteristics relative to broader equity indexes. It's clear that the intention is to create a less risky portfolio of shares, but there are also downsides to consider.

Firstly, its performance over the past three years has been less stellar than the standard MSCI World Index, with a total return of 31%, compared to the benchmark's gain of 53%. Additionally, fees may be somewhat more expensive than the cheapest ETFs on the market today, as the iShares' smart beta fund has a total expense ratio (TER) of 0.3%.

Dividends

For income investors, the SPDR S&P Euro Dividend Aristocrats UCITS ETF(LSE: EUDV) may be a better pick. The fund invests in the 40 highest yielding eurozone companies within the S&P Europe Broad Market Index that have either increased or maintained annual dividends for at least 10 consecutive years.

Shares in the ETF are sterling-denominated, making it simpler and potentially cheaper for most UK investors. But despite being sterling-denominated, investors are still exposed to currency risks -- as the fund's stock holdings are euro-denominated, your returns may fall or rise as the pound strengthens or weakens against the euro.

As of 31 July, France is its largest geographical exposure, representing nearly 30% of total assets, and this is followed by Germany (22.8%), Italy (12.5%) and the Netherlands (11.2%). The weighted-average dividend yield for its portfolio is 3.65% and the fund's TER is 0.35%.

Value

Finally, the Vanguard Global Value Factor UCITS ETF (LSE: VVAL) is one of my favourites among value-focused funds. It uses a rules-based active approach that favours stocks which trade at low multiples on book value, past earnings, estimated future earnings and operating cash flow. It's a relatively new fund, launched only in December 2015, but has so far performed well.

Since its inception less than two years ago, the ETF has delivered a total return of 52%, which significantly exceeds its benchmark FTSE Developed All Cap Index's performance of 36% over the same period. Looking ahead however, future outperformance can't be assured. Past performance may not be a good indicator for future results, and there are concerns that performance chasers are pushing prices to unsustainable levels.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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