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By Samuel Lee and Jeremy Glaser | 02-14-2014 03:00 PM

Should You Follow the Momentum Into Strategy ETFs?

Myriad strategy ETFs have come to market, but investors' allocations to these vehicles should depend on comfort level, says ETFInvestor editor Sam Lee.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. In the last year, we've seen the launch of many new strategy exchange-traded funds, but are any of them right for your portfolio? I'm here with Sam Lee--a strategist and also the editor of Morningstar ETFInvestor--to take a look.

Sam, thanks for joining me today.

Sam Lee: Thanks for having me here.

Glaser: Let's start with the definition of a strategy ETF. What are these, and how do they differ from traditional funds?

Lee: Traditional ETFs are mostly index funds. So they try to offer passive broad exposure to a market or market segment. Strategy ETFs on the other hand tend to offer an alternative exposure that tries to beat the market or offer some kind of enhanced exposure. You can think of dividend-weighted ETFs as strategy ETFs. These ETFs are what you could call quasi-actively managed because they do represent active tilts against the market.

Glaser: There were a lot of launches, probably some better than others. What are some of your favorites that you've seen come to market recently?

Lee: I'd say that in the past year, iShares has probably launched the best series of strategy ETFs. They call them the Factor ETFs. So the iShares MSCI USA Factor ETFs, and then they have various tickers.

And the reason why they're so excellent is because, number one, they're cheap. Most of them charge around 15 basis points, or 0.15%, of assets annually. And that's very close to what you would get from a passive exposure. And number two, they're backed by sound academic research. You have four of these ETFs; one that covers momentum, one that covers quality, another that covers size, and the other that covers value.

I'm not too interested in the size and value ETFs because if you've looked at the ETF market in general, you'll see that there are tons of value indexes, dividend indexes, small-cap, mid-cap indexes, and those are all essentially value and size factor strategy ETFs. So iShares isn't really offering anything new with those two ETFs, but the quality and the momentum ETFs I think are very excellent and very interesting.

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