Value Investing: Smart Beta Versus Style Indexes
Journal of Index Investing, vol. 5, no. 1, Summer 2014
Posted: 8 Feb 2017
Date Written: July 1, 2014
The active shares of traditional value style indexes are dominated by industry bets. They also capture less than the entire value premium; because they weight constituents on the basis of capitalization, they tend to hold large positions in overpriced stocks and small positions in underpriced (i.e., value) stocks. Smart beta strategies, in comparison, are better diversified, and they systematically buy low and sell high by periodically rebalancing to non-price-related target weights. In addition to exploiting mean reversion in prices, smart beta strategies profit from mean reversion in the value premium by effectively implementing a dollar cost averaging program.
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