20 – L1 19 Smart Beta V2

So, here’s the question, can a fund only be active versus passive, only alpha or beta? Well, if you’re at a restaurant, do you have to choose between soup or salad? Does your beverage have to be either milk or tea? What if you wanted a little bit of both? In fact, you can order a half soup and a half salad combo. You can also order a milk tea. Similarly, a portfolio can combine both active and passive management. This is often referred to as Smart Beta. Generally speaking, the idea is to start with the weights based on an existing index and use that as a starting point from which we can try to make improvements. So, for instance, if we can nudge the weights a little up or down from their original values, then we can aim to either improve returns or reduce risk. We call these Smart Beta portfolios because they’re beta portfolios that have some alpha sprinkled on top.

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