Finra wants investors to ask six “smart questions” when being sold smart beta ETFs, including:
- What is the product’s strategy?
- What are the costs?
- What are the potential advantages?
- What are the potential risks?
- How liquid is the product and its holdings?
- Are the performance figures back-tested?
“If you’re considering a product linked to a smart beta index, or have been contacted about purchasing such a product, it's important to understand how the index the product tracks is constructed, what factors are claimed to be captured, and whether it helps meet your overall investment objectives,” Finra said.
It will also benefit brokers and advisors selling smart beta products if they can explain and justify the use of these items in a portfolio, especially in the event of a market downturn.
“Some back-tested results and academic research on these products have highlighted the potential attractiveness of smart beta indices,” Finra said. “However, it remains an open question how the indices and products tracking them will behave in different market environments.”
The bulletin is Part 2 in Finra’s series, “Get Smart About Smart Beta.”