What distinguishes smart-beta indices from traditional index funds?

• A. They are strictly actively managed
• B. They are purely passive with cap-weighting
• C. They combine active and passive management and apply factor tilts (value, growth, etc.)
• D. They only track commodity prices

Answer: (C)

Smart-beta indices use a rules-based, largely passive methodology that tilts weights away from a pure market-cap mix to capture specific risk premia or factors, such as value, momentum, quality, or low volatility. This means they’re not simply tracking a stock basket by market capitalization, nor are they chosen through discretionary active stock picking. Instead, the weights are adjusted according to predefined factor signals and the index is rebalanced on a regular schedule, offering exposure to systematic risk factors with typically lower costs than active funds. This combination of passive construction with explicit factor tilts distinguishes them from traditional cap-weighted index funds. They aren’t about tracking commodities, which makes the option describing only commodity prices incorrect.