Quick Take:
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children.
- Date: 2025-09-23 09:11:08
Analyst Notes
Active and factor-based smart beta strategies offer alternative approaches to traditional cap-weighted indexes by emphasizing specific risk factors or characteristics rather than market capitalization. Factor-based strategies focus on systematic exposures to factors such as value, momentum, size, quality, and low volatility. These factors are derived from empirical research indicating that certain characteristics can lead to outperformance over time. In contrast, cap-weighted indexes allocate weight based on the market capitalization of constituent stocks, which can lead to overexposure to larger companies and sectors.
Smart beta strategies often employ screens to select stocks based on predefined criteria, such as earnings growth or dividend yield, and utilize periodic rebalancing to maintain desired exposures. This contrasts with cap-weighted indexes, which naturally adjust their composition based on market movements without active intervention.
Pros of smart beta strategies include the potential for enhanced returns through factor tilts, allowing investors to capitalize on specific market inefficiencies. However, a con is the potential for increased tracking error relative to traditional indexes, which may lead to performance deviations. Additionally, while smart beta can provide diversification benefits, it may also introduce complexity in portfolio management and require a deeper understanding of the underlying factors.
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Disclaimer: The information is for educational purposes only and does not constitute financial advice or an offer to buy/sell any security. Investing involves risk, including possible loss of principal.
