alleryStart learning →How does a smart-beta fund build the index it follows?
ABy weighting every holding equally across sectors
BBy ranking stocks on preset risk and return factors
CBy tracking the largest companies by market value
DBy letting a manager trade freely against the index
Answer & Solution
Correct answer: B. By ranking stocks on preset risk and return factors
1. Smart-beta funds are index funds with a twist in how the index itself is composed.
2. They rank stocks using preset factors relating to risk and return, such as growth or value.
3. Most traditional index funds instead weight by market capitalization, which is the option ruled out here.
4. Free trading against the index describes active management, not an index rule.
5. These funds aim to beat traditional index funds at a lower cost than active funds, but carry higher expenses than plain index funds.
_Source: US SEC Office of Investor Education and Advocacy, "Mutual Funds and ETFs: A Guide for Investors", section Smart-Beta Funds_
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