What are smart beta strategies designed to do?

Smart beta strategies are structured to outperform traditional capitalization-weighted indexes by employing alternative weighting techniques that do not rely solely on market capitalization. This approach combines features of both active and passive management, seeking to capture returns based on specific factors, such as value, momentum, or low volatility, rather than simply mirroring the biggest companies in the market.

Traditional market indexes are generally weighted by market capitalization, which can lead to an over-concentration of resources in larger companies at the expense of potentially undervalued smaller companies. Smart beta strategies aim to enhance returns and reduce risk by tilting the portfolio towards factors that have historically been associated with higher returns, thus representing a more nuanced approach to investment.

Other options, such as replicating traditional market indexes, focusing solely on high-risk assets, or investing only in government bonds, do not accurately capture the essence of smart beta strategies. They are designed to go beyond conventional approaches to investment management by harnessing systematic strategies aimed at enhancing performance relative to the market.