Smart-Beta Funds Blend Passive Efficiency with Active Strategy, Performance Varies by Market Factor

Smart-beta funds offer a hybrid approach to investing, merging passive index tracking with active management strategies. Unlike traditional index funds that simply mirror market capitalization, these funds follow specific rules tied to investment factors like value, momentum, quality, or low volatility. These factors are used to select stocks within an index, which is then periodically rebalanced. The performance of smart-beta funds is heavily dependent on market conditions and their specific factor tilts. For example, value and low volatility factors have outperformed in 2025, while momentum has struggled. Experts suggest these funds are best used for diversification or tactical allocation rather than as core portfolio holdings, as their effectiveness varies with market cycles.

Impact: This news impacts investors by educating them about advanced investment strategies beyond traditional index funds. It helps them make informed decisions about portfolio diversification and tactical allocation by understanding factor-based investing, its risks, and potential benefits, thereby influencing investment product selection and asset allocation choices. The impact rating is 7/10.

Difficult terms: Smart-beta funds: Funds that track indices but use predefined rules based on investment styles or factors (like value, momentum, quality, low volatility) rather than solely market capitalization. Passive investing: An investment strategy that involves buying and holding a diversified portfolio that mirrors a market index, aiming to match market returns. Active management: An investment strategy where a portfolio manager makes specific investment decisions to try and outperform a benchmark index through stock selection, market timing, or other methods. Market capitalization: The total market value of a company's outstanding shares, calculated by multiplying the current share price by the number of shares outstanding. Factors: Specific quantifiable characteristics or criteria used in quantitative investing to explain or predict asset returns. Common factors include value, momentum, quality, low volatility, and size. Rebalanced: The process of adjusting the holdings in a portfolio or index to maintain its target allocation or rules, typically done at regular intervals. Sectoral tilts: A strategy where an investment portfolio or index has a higher concentration of holdings in certain industry sectors than the broader market index, which can influence performance. Diversification: A risk management strategy that involves spreading investments across various assets or sectors to reduce the impact of poor performance in any single investment. Tactical investments: Short-term investment strategies that involve making opportunistic bets on specific assets or market segments based on current conditions, rather than long-term strategic allocations. Value factor: An investment strategy that seeks to identify and invest in stocks trading below their perceived intrinsic value, often indicated by low price-to-book or price-to-earnings ratios. Low volatility factor: An investment strategy that focuses on stocks historically exhibiting lower price fluctuations than the broader market, aiming to reduce portfolio risk. Momentum factor: An investment strategy that involves investing in assets that have recently experienced significant price increases, based on the assumption that past performance will continue. Quality factor: An investment strategy that selects companies with strong financial health, including stable earnings growth, low debt, and high return on equity. Equal-weight: An investment approach where each component of an index or portfolio is given the same weight, regardless of its market capitalization or other metrics. PSU (Public Sector Undertaking): A company where the government holds a majority stake, often involved in strategic sectors. Commodity-linked stocks: Shares of companies whose revenues and profits are closely tied to the prices of underlying commodities such as oil, gold, agricultural products, or metals. Defensive sectors: Industries like healthcare, utilities, and consumer staples that are considered less sensitive to economic downturns, as demand for their products and services tends to remain stable. FMCG (Fast-Moving Consumer Goods): Everyday items that are sold quickly and at relatively low cost, such as food, beverages, toiletries, and over-the-counter drugs. IT (Information Technology): The sector encompassing companies involved in software development, hardware manufacturing, IT services, and telecommunications. Mid-caps: Companies with a market capitalization that falls between large-cap and small-cap companies, generally considered to offer a balance of growth potential and risk. Small-caps: Companies with a relatively small market capitalization, often seen as having higher growth potential but also higher risk compared to larger companies. Sharpe ratio: A measure used to evaluate the performance of an investment by calculating the excess return per unit of volatility (risk). A higher Sharpe ratio indicates better risk-adjusted performance.