Insights | The intuitive foundations of smart beta

Nearly half of global asset owners are now investing in smart beta1, with interest continuing to rise year- over-year. The term “smart beta” encompasses an increasing variety of strategies, with many new smart beta products being launched each month around the world. Smart beta products typically aim to replicate indexes that embed the strategies’ underlying methodologies.

Although some newer index approaches rely on detailed quantitative modelling, smart beta indexing doesn’t have to be associated with complexity. In this Insights, we focus on some smart beta index construction approaches that follow relatively simple, intuitive weighting schemes. And, regardless of their methodology, all FTSE Russell smart beta indexes follow transparent, consistent rules in order to achieve the stated index objectives.

Smart beta in context
An increasing number of investors worldwide are using index-based approaches to construct and manage their portfolios. The objective of a manager of an index-based (or “passive”2) investment portfolio is to replicate the index’s return, before fees and costs.

According to a 2017 report3 by Moody’s Investor Services, passive investments now account for US$6 trillion of assets globally and 29 percent of assets under management (AUM) in the US. Moody’s predicts that the continuing adoption of index-based investment products will lead to passive funds’ market shares in the US exceeding 50 percent by early in the next decade.

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