Research

Smart Beta & Fundamental Index

Smart beta strategies offer the potential for better-than-market returns, without sacrificing the benefits of traditional passive indices, by using fundamentals rather than price to select stocks, thus breaking the link between price and weight.

Breaks the link between price and weight

First introduced in approximately 2008, the term smart beta is now one of the most popular concepts in modern finance. Yet confusion remains about what smart beta actually means. While arguably complex in theory, it is simple in practice.

At its core, smart beta breaks the link between price and weight by systematically selecting, weighting, and rebalancing portfolio holdings based on factors or characteristics other than market capitalization. By doing so, it offers the potential for better-than-market returns without sacrificing the benefits of traditional index-linked strategies, specifically, broad market exposure, rules-based implementation, transparency, and low cost.

Bridges the gap between active and passive investing

Investors have been able to utilize alternatively weighted indices for longer than the term smart beta has been around. For example, the Fundamental Index™ strategy, which weights securities by four measures of company size—sales, cash flow, dividends + buybacks, and book value—rather than market capitalization was launched in 2005, three years before anyone had heard of the term smart beta!

Smart beta has become so popular that the term is now controversial. Semantics aside, the concept is a significant development in investment management that helped to bridge the gap between active and passive investing.

Further Insights

Research Affiliates, our sister company, has published a number of articles to help investors
weed out the noise in smart beta and maximize the benefits of the strategy.

Alternative to a Manic AI Market: RAFI vs Equal-Weight

With soaring valuations driven by AI mania, major tech stocks, including the Magnificent Seven, are at historically high concentration levels in cap-weighted indices. To mitigate concentration risk, investors need a broad-market strategy superior to naïve equal-weight indices.

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Rocking with RAFI: International Evidence

From 2007 to 2022, a hypothetical RAFI index, whose constituents are weighted based on their economic footprint, outperformed cap-weighted broad market and value indices not only in the US but also in Developed, Developed ex US, and Emerging Markets.

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RAFI™ Fundamental Index: Why Now?

RAFI Fundamental Index strategies are poised to outperform... Currently trading at low valuation levels, RAFI Fundamental Index strategies have a history of outperformance during periods of heightened inflation, bear markets, and recessions.

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Fundamental Indexation

This study investigates whether stock market indices based on an array of cap-indifferent measures of company size are more mean–variance efficient than those based on market cap. Published in the Financial Analysts Journal. Winner of the 2005 William F. Sharpe Indexing Achievement Award for Best Index-Related Research Paper.

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The Surprising Alpha
From Malkiel’s Monkey
and Upside-Down Strategies

Smart beta strategies have beaten the market over long time periods. Outperformance persists even when these strategies are turned "upside down." Published in the Journal of Portfolio Management. Winner of the 2014 Bernstein Fabozzi/Jacobs Levy Award for Outstanding Article.

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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.

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