‘Smart beta’ investment strategies use economic insights to systematically screen widely-used indexes and benchmarks to capture broad, persistent drivers of returns other than market capitalisation (the total value of all shares in a company).
For instance, one of the most common investment vehicles is an equity index fund—a fund that pools shares of all the companies on a given index (say, the FTSE 100) relative to each company’s market capitalisation.
The more an individual company is worth, the greater will be its share of the fund relative to the others on the index.
A ‘smart beta’ fund might include those same 100 companies, but weight them in a different way—for instance by the dividends they pay or by the historical average of their volatility, to name just two of the other ‘factors’ beyond market cap by which companies can be selected and ranked.
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