Quick. Name the hottest trend in exchange-traded funds (ETFs) these days? There’s a good chance you said smart-beta or fundamental ETFs.

And you’d be right. With investors looking to be better than “average,” the use of alternative indexing has exploded in recent years. The vast bulk of new ETFs launched have all sought to exploit various factors or differences in indexing to beat the market. Some of the hottest ETFs have looked to specifically target known factors – with momentum, quality, value and size being the biggest recipients of investors’ cash.

But there is another “factor” that many investors are ignoring and that could lead to outsized returns. And that’s “liquidity.”

The liquidity factor is often tucked under the rug when it comes to smart-beta ETFs. However, it’s equally as important to portfolios and could represent an additional chance for outperformance.

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