Definition
Smart-Beta Index
A smart-beta index is a rules-based benchmark that weights or selects constituents by factors or alternative metrics rather than market cap, serving as the underlying for smart-beta funds and ETFs.
Indian smart-beta indices, published by NSE Indices and BSE, include momentum, value, quality, low-volatility, alpha and equal-weight variants. They codify a factor strategy into a transparent, replicable index that smart-beta ETFs and index funds can track.
The index's methodology, factor definitions, selection thresholds, capping and rebalancing frequency, determines its turnover, concentration and factor purity. Because it deliberately departs from cap-weighting, a smart-beta index will diverge from the broad market, carrying the factor's cyclical risk into any product that tracks it.
Related terms
- Factor InvestingFactor investing is the systematic targeting of securities with specific measurable characteristics, called factors, that academic research has linked to higher long-run risk-adjusted returns.
- Smart BetaSmart beta refers to rules-based index strategies that weight securities by factors or alternative metrics rather than by market capitalisation, aiming to improve returns or reduce risk versus a plain cap-weighted index.
- Index MethodologyIndex methodology is the detailed, published rulebook governing how an index selects, weights, caps and reviews its constituents, ensuring the index is transparent, replicable and consistent over time.
- Smart-Beta ETFA smart-beta ETF tracks a rules-based factor or alternative-weighting index rather than a plain market-cap index, aiming to capture factor premia such as momentum, value, quality or low volatility.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.