As a new generation of smart-beta index-based ETFs become more widely known, investors are beginning to try and grasp the idea about trading in an alternative index that does not follow the traditional market-capitalization weighted methodology.

However, many are wondering what “smart-beta” really means.

“Smart beta is simply about trying to identify good investment ideas that can be structured better… smart beta strategies should be simple, low cost, transparent and systematic,” according to Towers Watson, a leading global investment consulting firm that first coined the smart beta expression.

However, many alternative beta strategies fall short of this definition, according to Research Affiliates, the company behind the line of RAFI fundamental indices. Specifically, the research firm argues that some are overly complex or opaque in their value added, others incur unnecessary costs and there are those that don’t meet up to the smart-beta standards at all.

“The absence of a rigorous, generally accepted definition gives me-too firms enough latitude to stamp smart beta on anything that’s not cap-weighted indexing,” Research Affiliates said.

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