But even as investors enthusiastically embrace these strategies, many people still have questions: How is smart beta defined? What role does it play in a portfolio? And why is it gaining traction now?
The answers to these questions start with looking at the broad, persistent forces that tend to drive returns in your portfolio.
First, smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way.
So what are factors? They are the building blocks of portfolios.
I compare smart beta to the nutrients in foods. Just as fat and proteins are present in both cheese and meat, you'll find that certain common factors, such as value or momentum, are pervasively present in stocks and bonds.