An evaluation of smart beta and other rules-based active strategies

September 4, 2015

 

Rules-based alternatives to market-capitalization-weighted indexes, be they called alternative indexing, indexing on fundamentals, or smart beta, allure investors seeking to outperform the broad market with the promise of excess returns. Despite the increased interest, though, no consensus definition for smart beta exists. In this Vanguard research paper—An evaluation of smart beta and other rules-based active strategies—authors Chris Philips, Don Bennyhoff, Fran Kinniry, Todd Schlanger, and Paul Chin define and examine smart-beta strategies. They show how the "excess return" of such strategies can be partly (and in some cases largely) explained by time-varying exposures to various risk factors, such as size and style.

Use this paper to:

  • Analyze the past performance of smart-beta strategies versus the broad market.
  • Understand how time-varying exposures to risk factors, not divorcing a security's index weighting from its price, drive returns in smart-beta strategies.
  • Learn about viable alternatives to nonmarket-cap-weighted index strategies for trying to outperform the broad market.
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Additional materials

Note:

  • All investments are subject to risk, including possible loss of principal.
 

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