Smart beta funds have attempted to address these issues by taking a hybrid approach. Unlike expensive actively managed funds, smart beta funds take a methodical index-based approach to building a portfolio that differs from market capitalization weighting mechanisms—potentially offering market-beating returns.
In the NBER report, researchers noted that flows into index funds predict a high future return for small-minus-large index portfolios. They found that such portfolios earned ten percent per year between 2000 and 2019, significantly outperforming large-cap stocks in the index, and surprisingly, small cap stocks that were not in the index.
Investors may want to consider low-cost smart beta funds focused on smaller companies with attractive fundamentals. While these funds may underperform indexes at times, research suggests that they will outperform passive index funds over the long run if investors can withstand the potentially greater risk and volatility in the interim.
There are also a handful of actively managed mutual funds that have been strong performers over the long run:
- Vanguard Wellington Fund Investor Shares (VWELX)
- Fidelity Magellan (FMAGX)
- T. Rowe Price New Horizons Fund (PRNHX)
Don’t forget to check out this article to know how smart beta strategies can be helpful.