A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

by Burton G. Malkiel

If you believe a subset of securities will give you superior returns, you are counting on some “dumb” investors to hold portfolios producing poorer returns. Some “smart beta” advocates have been quite explicit in suggesting who these dumb investors might be. They claim that the investors in traditional capitalization index funds are the dumb beta investors, since by holding the broad index they will be holding a number of overvalued growth stocks. But that argument must be false. The holder of a broad-based index fund will by definition achieve the average return for the market. If “smart beta” funds generate above average returns, it can’t be at the expense of traditional index-fund investors—it must be at the expense of all active managers who do not hold the market portfolio. • To the extent that “smart beta” funds do generate excess returns, it is most likely because they are assuming greater risks.