Some industry insiders are concerned that “smart beta” may simply be a fad. We don’t agree. And it would seem that investors don’t either. (Unsure what smart beta is? Read this.) That may seem like a pretty confident statement, but consider that numbers usually don’t lie:

• One-quarter of exchange-traded fund (ETF) inflows in the first 11 months of 2013—$41 billion—went into ETFs characterized as smart beta by Morningstar. Total assets in smart beta ETFs as of that point in time stood at $271 billion, approximately 17% of the total assets in ETFs.¹

• According to a new study conducted by Cogent Research (a division of Market Strategies International), more than half (53%) of institutional decision makers will increase their use of smart beta ETFs over the next three years—that’s more than any other ETF category, including market capitalization-weighted ETFs (48%).²

These two statistics alone could make smart beta the largest category of ETFs—and a primary driver of ETF growth going forward. And if this type of explosive growth continues, ETF assets could match equity mutual funds in assets under management (currently at $7.6 trillion)³ in less than a decade. Now, while we don’t believe smart beta is a trend, we do believe that investors should beware of asset managers and investments that may be jumping on this bandwagon—capitalizing on smart marketing rather than smarter investment methods. In our opinion, when it comes to identifying smart beta ETFs, investors should look for:

• A rules-based, repeatable methodology that offers broad, representative exposure to an asset class

• Alternative weighting methods that allow for ample investment capacity

• High correlation to established benchmarks

• Regular rebalancing

• A proven track record on a total and risk-adjusted return basis

At WisdomTree, we do things differently. In 2006, we launched one of the first families of alternatively weighted ETFs, calling them "fundamentally weighted." In fact, our family of fundamentally weighted ETFs has proven itself for more than seven years (including during the market crisis of 2008–09). How? Our ETFs are built with proprietary methodologies, smart structures or uncommon access to provide investors with the potential for income, performance, diversification and more. To learn more about smart beta, read the full paper here. In future installments, we’ll discuss how WisdomTree created the first smart beta investments—and much more.

¹Source: Source: Reshma Kapadia, “No Sugarcoating: Smart-Beta ETFs Vary Widely,” Barron’s, 1/4/14.
²Source: Marketwired, LP, 12/11/13. ³Source: Investment Company Institute, as of 11/30/2013.