A type of an exchange traded fund (ETF), that screens and weighs its component securities based on factors related to strategic beta (smart beta) investing. Smart beta strategies do not concentrate on selection based on market capitalization (market cap)- that is, a smart beta fund is not market-cap weighted, meaning that the largest companies do not have the largest weight in the underlying index.

Smart beta represents a mixture of active and passive investing, pegged to an index, as well as a host of alternative methodologies. By focusing on considerations other than market cap, smart beta ETFs aim to avoid the influence of one stock or issuer as determinant of the fund’s value.

Smart beta (strategic beta) provides a different way of constructing an index basket, particularly by means of equal weighting, fundamental weighting, low volatility, and minimum variance. Smart beta strategies are usually determined based on the population of securities from which a fund’s components are selected, in addition to economic (or other) factors used in screening, the weighting methodologies applied, among others.

By under- or overweighting certain types of securities, a smart beta strategy could help in taking a particular view on the market. For example, an investor may select to construct an equal-weight ETF if companies other than large caps are expected to perform better than the market.

Smart beta ETFs take many forms or may be identified as per multiple strategies including: return oriented smart beta ETFs, risk oriented smart beta ETFs, and equal-weight smart beta ETFs.