Style ETFs, as the name suggests, are exchange traded funds which passively follow an investing style like growth investing style or value investing style. Rather than investing directly in growth or value stocks, they track specific style indexes like S&P, Russell or Barra style composites. Eg: Russell 2000 growth, Russell 2000 value, S&P/Barra Small Caps, etc. By following a specific style, style ETFs try to achieve some specific portfolio goals like less risk or more return rather than tracking a more broad/narrow index.
Style ETFs are very good instruments to include in an investing portfolio.
- They help investors to passively explore an investing style; thus can be used to achieve some specific investing goals.
- They are very good instruments for portfolio diversification.
- They allow investors to test different investing strategies; and their past performance can be evaluated and compared to easily find out a most suitable investing style.
- They are very good hedging tools; especially when you are dealing with a less-diversified portfolio composed of one style investments.
- They are good instruments for long-term investments and take less time to screen than screening stocks they passively track.
Now there are many style ETFs available for investors, especially for US investors. They vary greatly in investing style and the index they follow. One thing to remember is, the style indexes are reconstituted periodically; once or twice a year. Thus one index can have very different stocks than the other, so does a style ETF tracking it. Thus finding the right style ETF can greatly enhance portfolio performance.
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