Innovation in the development of financial tools has been tremendous over the last several decades. There have been advances in robust risk-modeling software, algorithmic trading, and the evolution from investment vehicles, such as mutual funds with various front-end and back-end loads to low-cost ETFs.
The ETF industry continues to experience exponential growth and has seen inflows of $380 billion in 2017 so far. As ETFs gain favor with investors, innovation is accelerating. When ETFs first launched in the early 1990s, they were developed as short-term trading vehicles that allowed investors to quickly gain exposure to broad-market baskets at intra-day pricing.
These days, enhanced indexing, also known as smart beta, is growing in popularity. This systematic, rules-based approach attempts to isolate particular factors or themes that are proven to add incremental value over time and are necessary to correct some of the pitfalls of market-cap-weighted exposure.