As Bloomberg reports, traditional ones such as the S&P 500 are collections of securities weighted by market value, and index funds and ETFs mimic them as a low-cost way to deliver the market’s performance. Many new indexes are different:They include stocks based on custom criteria, such as having low volatility or high dividends.The recent explosion in indexes has been driven by demand as many new benchmarks essentially repackage active investment strategies into indexes, says Eric Balchunas, senior exchange-traded fund analyst at Bloomberg Intelligence. They can then be tracked by so-called smart-beta ETFs, which fund companies are rolling out rapidly. Money managers are under pressure to cut costs, says Balchunas, as investors shift their money into funds with low fees. Smart-beta ETFs are generally more expensive than S&P 500 funds but cheaper than actively managed funds. It remains to be seen how well the new funds will perform.
The takeaway from this is that in up markets, such as we've seen, ETFs and Index funds tend to outperform active managers. This makes sense because active managers tend to be more cautious than an automated index.
The reverse of this is also true. With the rush of investors into indexes and ETFs, it is important to note that on the downside, active investors tend to outperform passive or index funds and ETFs. Just when this switch should take place is up for discussion. What is important to know now is just "that it's a thing".