Which characteristic differentiates smart beta from traditional investment strategies?

Smart beta is primarily characterized by its rules-based approach to portfolio construction and weighting. Unlike traditional investment strategies, which often rely heavily on market capitalization to determine the composition of a portfolio, smart beta employs alternative factors, such as value, size, momentum, or volatility, to systematically capture specific investment returns.

The rules-based nature of smart beta strategies means that they apply predefined metrics or rules to select and weight securities, providing a structured way to seek out performance enhancements or risk management. This systematic process contrasts with traditional strategies that might prioritize market cap weighting, which can lead to concentration in larger companies and potentially higher risk.

This differentiation allows smart beta to blend elements of both passive and active management strategies. It aims to achieve better risk-adjusted returns while maintaining a cost-effective and systematic approach, rather than relying on subjective judgments or the fluctuating positions associated with active trading management or investment in specific types of stocks like blue-chip companies.