This paper* attempts to debunk no fewer than ten myths about smart beta. For instance, the authors challenge the view that any alternatively weighted strategy beats a cap-weighted market index, and the notion that it is rebalancing that drives the performance of smart beta strategies. They also address concerns about liquidity, turnover and crowding, and discuss good versus bad smart beta index construction.
We agree overall with their arguments, which help to provide clarity in an area where confusion can sometimes still reign. Another concern about smart beta indices that we would add is that all such indices have their limitations and pitfalls, so a more sophisticated approach is needed to unlock the full potential of factor premiums.
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