PT - JOURNAL ARTICLE AU - ZĂ©lia Cazalet AU - Pierre Grison AU - Thierry Roncalli TI - The Smart Beta Indexing Puzzle AID - 10.3905/jii.2014.5.1.097 DP - 2014 May 31 TA - The Journal of Index Investing PG - 97--119 VI - 5 IP - 1 4099 - https://pm-research.com/content/5/1/97.short 4100 - https://pm-research.com/content/5/1/97.full AB - In this article, the authors consider smart beta indexing, which is an alternative to capitalization-weighted (CW) indexing. In particular, the authors focus on risk-based (RB) indexing, the aim of which is to capture the equity risk premium more effectively. To achieve this, portfolios are built that are more diversified and less volatile than CW portfolios. However, RB portfolios are less liquid than CW portfolios by construction. Moreover, they also present two risks in terms of passive management: tracking difference risk and tracking error risk. This article examines the trade-off relationships that smart beta investors have to puzzle out among diversification, volatility, liquidity, and tracking error. The authors also define the return components of smart beta indexes.TOPICS: Mutual funds/passive investing/indexing, analysis of individual factors/risk premia, portfolio construction