Smart Beta Basics

Before the Fundamental Index™, investors had two choices of strategy—

Active or Passive

Each had its own argument to make.
Investors who believed markets were largely efficient, or doubted their ability to select skillful managers, leaned toward low-cost market capitalization–weighted index funds.

Investors who believed markets were inefficient and had confidence in their manager selection process were more inclined toward active management.

But both were “false choices.”
Market cap–weighted equity index funds automatically increase their exposure to stocks whose prices appreciate and reduce their exposure to stocks whose prices depreciate. As a result, they tend to overweight overvalued stocks and underweight undervalued stocks.

Active management, unlike a rules-based objective strategy, is not transparent, comes with high fees, and tends to underperform its benchmark over long time periods.

What “Smart Beta” Means to Us

The controversial term “smart beta” is used so broadly in the marketplace that it risks becoming meaningless. This article describes the characteristics of equity strategies that, in our view, merit the smart beta designation.

What Makes Alternative Beta Smart?

A smart beta strategy should be “low cost, transparent and systematic,” according to Towers Watson. Our research suggests many alternative beta strategies fall short.

The Promise of Smart Beta

Beyond the debate over definitions, smart beta strategies can be the prime alternative to active management for our times just as cap-weighted index funds served so admirably in that role for the past four decades.


In periodically rebalancing to target weights that are unrelated to price, smart beta strategies engage in value investing: They buy low and sell high.”

Rob Arnott, Chairman & Chief Executive Officer

How to Invest

Access our strategies through leading asset managers around the world.