Why Not Everyone Thinks Smart Beta's a Smart Idea: QuickTake Q&A

They call them smart-beta funds, but there are plenty of critics who say they’re anything but smart. What they certainly are is popular: investors have poured more than $430 billion into them over the past decade. The hope is that they deliver the kinds of market-beating returns that pricey hedge funds have long dangled before rich investors, but at index-fund fee levels. The fear is that it’s become yet another way for investors to buy into a bubble.

If somebody asks how risky an investment is, a natural answer is, compared to what? Beta is one way of quantifying that kind of comparison, to give a better sense of what kind of risk and reward to expect in an investment portfolio. Markets go up and down; the extent of their swings is known as volatility. If your portfolio’s volatility matches the volatility of the market you’re comparing it to, its beta is 1. For example, that’s the beta of a fund that exactly matches the S&P 500 index.