Demystifying ‘Smart Beta’ Funds
Many exchange-traded funds (ETFs) have their holdings weighted by market capitalization. In other words, the total market value of a company’s shares determines what proportion of an ETF’s assets are invested in that holding. But “smart beta” funds are different, since they are not market-cap weighted.
For example, the market-cap-weighted SPDR S&P 500 (SPY), an S&P 500 ETF, has as its top two holdings Apple (AAPL), 3.36%, and Exxon Mobil (XOM), 2.47%. Apple is a bigger company than Exxon Mobil, so it has proportionally more representation in SPY’s holdings.
Although “smart beta” funds also follow a passive index like other ETFs, the smart beta funds do so in ways besides the traditional market-cap-weighted approach.
Read more about smart beta funds at Eagle Daily Investor.