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Smart beta investing seeks to provide a cost-effective, rules-based strategy to potentially outperform a traditional market cap-weighted benchmark. Smart beta ETFs are designed to capture specific factors, or investment characteristics, that drive risk and return — and can do so in a relatively low-cost, systematic manner.
Factors—characteristics such as value, quality, size, momentum, volatility and dividend yield — are one of three elements that can drive portfolio returns. Extensive research has shown that factor exposure accounts for 50% to 80% of a portfolio’s excess return above a market cap-weighted benchmark.1