Definition
Smart beta strategies use alternative index construction methodologies—equal weighting, fundamental weighting, factor-tilting, or minimum volatility—to potentially enhance returns or reduce risk versus cap-weighted indices. They occupy the middle ground between passive indexing and active management, offering systematic factor exposure at lower cost than active funds.
lightbulb Example
A value-weighted smart beta ETF selects the cheapest 30% of large-cap stocks by P/E and P/B, rebalancing quarterly. It charges 0.15% versus 0.03% for a market-cap index fund, capturing the value premium systematically.
verified_user Key Points
- Rules-based alternative to cap-weighted indexing
- Targets specific factors: value, momentum, quality, low-vol
- Lower cost than active management
- May underperform cap-weighted in growth-dominated markets