What type of investment is generally used in smart beta strategies?

Smart beta strategies primarily utilize factor-based investment strategies. These strategies seek to enhance returns or reduce risk by targeting specific factors that have been shown to outperform traditional market indices over time. Factors might include value, momentum, low volatility, size, and quality.

Unlike traditional index strategies, which typically weight securities by market capitalization, smart beta approaches often involve constructing indices that apply alternative weighting methodologies based on these factors. By focusing on characteristics that have historically delivered higher risk-adjusted returns, smart beta aims to provide investors with the potential for superior performance compared to conventional market-capitalization weighted indices.

This differentiates smart beta from real estate investments, fixed-income securities, and traditional market-capitalization weighted indices, which do not inherently use a factor-based approach in their construction or strategy. The emphasis on factor analysis is what distinctly characterizes smart beta investments.