Smart beta selects or weights securities using systematic rules that target nonmarket factors rather than relying only on traditional market capitalization. It appears in ETFs and robo-advisor portfolios, either replacing or complementing standard index funds. section 4.4 section 4.5
Common equity factors include:
- Momentum: favoring stocks with higher recent returns. section 4.4.1
- Quality: favoring stable, profitable companies. section 4.4.1
- Low beta: favoring companies with lower CAPM betas. section 4.4.1
An index can combine factor scores with an optimization step, such as maximizing weighted scores while constraining industry weights near those of a standard index. Providers offer single-factor and multifactor ETFs, while some robo-advisors implement the approach through direct stock holdings. section 4.4 section 4.4.1
