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Which type of ETF is also referred to as smart beta ETF?
Rules-based ETFs, also known as smart beta ETFs, use predetermined rules or algorithms to select and weight securities in their portfolios. These ETFs aim to outperform traditional market-capitalization-weighted ETFs by targeting specific factors such as value, momentum, quality, or volatility.
Characteristics of Smart Beta ETFs:
Strategic Factor Weighting: Securities are weighted based on fundamental or quantitative factors, not just market capitalization.
Higher Returns Potential: These ETFs are designed to capture excess returns (alpha) relative to a benchmark.
Lower Costs: Smart beta strategies often combine active and passive management elements at a lower cost than traditional active funds.
Explanation of Options:
A . Rules-based: Correct answer. Smart beta ETFs are built on rule-based frameworks designed to achieve specific investment objectives.
B . Standard: Refers to traditional, market-cap-weighted ETFs, not smart beta.
C . Synthetic: Refers to ETFs that use derivatives to replicate returns of an underlying index, unrelated to smart beta.
D . Index-based: Includes standard ETFs tracking an index but does not apply specifically to smart beta.
CSC Volume 2, Chapter 19: Smart Beta and Rules-Based ETFs, which describes their unique features, benefits, and strategies.