By CovestorIn recent years, smart beta strategies have attracted a sizable following among investors seeking more diversification, better returns and low fees in an uncertain economic climate.Consider that there are now more than 450 US-listed smart beta products, with a collective $510 billion in assets, according to investment research firm Morningstar. Unfortunately, smart beta is one of those financial concepts that's widely used but sometimes thinly understood.
First off, let's define what we mean by beta. This is a volatility measure of an investment relative to the overall market's performance.For example, the S&P 500 Index is widely considered a proxy for the US stock market. If an individual stock or fund moves perfectly in tandem with this benchmark, it is said to have a beta of 1.In general, a higher beta means higher risk.
Smart beta investments seek to outperform the overall market and minimize risk.They do so by altering the underlying composition of investments that populate benchmark indexes, exchange-traded products, open-end funds, and other investment products that track the overall market.Many benchmark indices, and the ETFs that mirror them, are typically market-capitalization weighted.
Consider the S&P 500 again. A large-cap stock like Apple (AAPL) has a far bigger weighting than a smaller-cap company such as AutoNation (AN).