Smart Beta
A rules-based index strategy that weights constituents by a chosen factor rather than by market capitalisation.
How it is identified
Test: constituent weights are determined by a published rule based on a factor such as value, quality, momentum, low volatility or equal weight
Unit
qualitative
In depth
Smart beta sits between passive and active: the rules are mechanical and disclosed like an index fund's, but the deviation from market capitalisation weighting is a deliberate bet like an active manager's. Factor premiums have academic support over long periods and long stretches of underperformance in between, so patience is a requirement rather than an option. The rules and rebalancing frequency vary between providers, so two funds on the same factor can hold very different portfolios. Costs sit above plain index funds and below active ones, and the historical record of a factor index is usually a backtest rather than live performance.
Worked example
A low-volatility index selects the fifty least volatile stocks and weights by inverse volatility. Its stated ten-year record may include eight years computed backwards from a rule written afterwards, which is not the same as ten years of results.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Smart Beta” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.