As the population of smart beta products has exploded, the quest to differentiate among them has focused on portfolio construction. The authors of this article aim to shift the conversation back to what actually matters to asset owners: investment outcomes. Their taxonomy of smart beta strategies, supported by a comprehensive analysis of simulated historical returns over three decades covering both developed and emerging markets, distinguishes between three stated portfolio construction objectives (enhanced diversification, factor investing, and fundamental weighting) and two investment outcomes (core exposure and style investing). The investment outcomes are characterized by performance patterns as well as such qualitative considerations as benchmark sensitivity, turnover levels, and underlying beliefs about market inefficiencies and the merits of broad diversification. Their classifications highlight how smart beta is more than just factor investing, with which it has become increasingly identified. Some strategies aimed at enhanced diversification are style neutral and thus suitable for core, while others, in fact, deliver backdoor style tilts. As in all things, with smart beta, caveat emptor.
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