The Smart Beta Indexing Puzzle

Posted: 22 May 2019

See all articles by Zélia Cazalet

Zélia Cazalet

Lyxor Asset Management

No Name

affiliation not provided to SSRN

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: July 11, 2013


In this article, we consider smart beta indexing, which is an alternative to capitalization-weighted (CW) indexing. In particular, we focus on risk-based (RB) indexing, the aim of which is to capture the equity risk premium more effectively. To achieve this, portfolios are built which are more diversified and less volatile than CW portfolios. However, RB portfolios are less liquid than CW portfolios by construction. Moreover, they also present two risks in terms of passive management: tracking difference risk and tracking error risk. Smart beta investors then have to a puzzle out the trade-off between diversification, volatility, liquidity and tracking error. This article examines the trade-off relationships. It also defines the return components of smart beta indexes.

Keywords: Smart beta, risk-based indexing, minimum variance portfolio, risk parity, equally weighted portfolio, equal risk contribution portfolio, diversification, low beta anomaly, low volatility anomaly, tracking error, liquidity

JEL Classification: G11

Suggested Citation

Cazalet, Zélia and Name, No and Roncalli, Thierry, The Smart Beta Indexing Puzzle (July 11, 2013)., Available at SSRN: or

Zélia Cazalet

Lyxor Asset Management ( email )


No Name

affiliation not provided to SSRN

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex

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