Scientific Beta

This paper reviews ten common but mistaken claims about Smart Beta, and sheds light on the underlying issues by examining conceptual considerations and empirical evidence.

Smart Beta strategies, as one of the strongest growth areas in investment management recently, have established a space in between traditional capitalisation-weighted (or "cap-weighted") passive investments and traditional (proprietary and discretionary) active management. Perhaps unsurprisingly, Smart Beta has drawn fierce criticism from both advocates of traditional active management and of traditional passive management. In a nutshell, proponents of proprietary active strategies complain that Smart Beta is not active enough while proponents of traditional cap-weighting say that Smart Beta is not passive enough. Smart Beta providers have not only responded to such criticism, but have also been vocal about the benefits of their respective approaches, without necessarily agreeing with one another. Such debates have too often led to misconceptions. The objective of this paper is to review ten common but mistaken claims about Smart Beta, and to shed light on the underlying issues.