united kingdomen

Smart beta or alternative beta

An index strategy that aims for a better risk-return ratio than the traditional market-capitalization weighted index. 'Smart beta' refers to the higher expected index performance, in terms of risk and return.

The smart-beta strategy is an alternative index strategy for investing in a market-cap-weighted index, since the market-cap-weighted approach has a number of constraints for investors. For instance, most of the money flows into stocks with the highest valuation. This means that investments are made counter to the Value factor, which focuses on selecting stocks with a lower valuation.

Just like factor investing, smart beta strives to create an improved risk-return ratio. An important aspect is that smart-beta strategies are not passively, but actively managed. Examples of smart-beta strategies are equally weighted equity strategies or low-volatility strategies.

Although smart-beta factor approaches have proven capable of using factor premiums, there are a number of pitfalls. Taking unrewarded risk is an example, as are taking on higher transaction costs and the negative effects of other factors.

Also read: How Smart is 'Smart Beta' Investing?

Quantitative investing: invisible layers surface to deliver attractive returns
Quantitative investing: invisible layers surface to deliver attractive returns
Read more
Factor investing debates: Do big data and AI herald a new dawn for quant?
Factor investing debates: Do big data and AI herald a new dawn for quant?
Factor investing is based on decades of publicly available empirical studies.
11-01-2021 | Insight
Has Low Volatility lost its mojo?
Has Low Volatility lost its mojo?
2020 has been a difficult year for Low Volatility investors and this year’s performance has been truly challenging, amounting to a period of soul searching.
21-12-2020 | Insight
Podcast: Why I believe the quant winter will end
Podcast: Why I believe the quant winter will end
Will value stocks make a comeback in 2021?
17-12-2020 | Podcast