Beyond the S&P 500: Traditional, Smart-Beta, and Quant Index Funds Explained

Index Funds: Traditional and Not-So-Traditional

Index funds have become the backbone of many long-term investment portfolios — and their share of the market keeps growing. But not all index funds are built the same way, and understanding the differences can help you make more informed decisions about your portfolio.

The Rise of Index Investing

Index funds accounted for more than half of long-term fund assets in 2025. These funds attempt to track the performance of a market index by holding all — or a representative sample — of the securities within it. Many funds follow well-known benchmarks such as the S&P 500, Russell 2000, or NASDAQ Composite. But there are hundreds of other indexes tracking various segments of the stock and bond markets.

This approach is known as passive management, and it typically allows index funds to carry lower fees than comparable actively managed funds, where a fund manager selects securities to meet an objective and may buy or sell as conditions change. Lower turnover of securities in index funds can also reduce capital gain distributions — which may help lower tax liabilities and improve after-tax performance.

A Decade of Growth

Index funds have nearly doubled their share of the fund market over the past decade, with exchange-traded funds (ETFs) becoming the most common type of index fund.

20152025Index ETFs14%31%Index Mutual Funds15%21%Actively Managed Funds72%48%

Source: Investment Company Institute, 2026 (percentage of net assets in long-term funds, year-end; may not total 100% due to rounding)

Watch the Weight

Traditional index funds provide exposure to the market — or selected portions of it — and can be helpful in establishing and maintaining an appropriate asset allocation and diversification strategy. However, most indexes followed by traditional funds are weighted based on market capitalization, meaning the value of a company's underlying shares. As a result, the largest companies tend to dominate the index — and the fund.

For example, in the summer of 2026, the top 10 stocks in the S&P 500 Index accounted for more than 35% of its total market capitalization.¹ If you own an S&P 500 index fund, you may be more heavily invested in those 10 companies than you realize. That isn't necessarily a bad thing — large companies often earned their size through success — but it's an important factor to understand when analyzing your portfolio's true diversification.

Alternative Approaches to Indexing

Not all index funds follow the traditional, capitalization-weighted model. Two alternative strategies have grown in popularity:

Smart Beta / Strategic Beta / Factor-Based Investing This approach tracks indexes that are selected and weighted based on factors other than market segment or capitalization — such as momentum, risk, volatility, earnings, growth potential, price-to-book value, dividend growth or yield, cash flow, or equal weighting of all securities. A smart-beta fund may focus on a single factor or several, and may track an existing index or one created specifically for that fund.

Quantitative Investing (Quant Funds) Quant funds construct an index and fund using sophisticated computer models — leveraging quantitative analysis, algorithms, or machine learning to guide security selection.

Both of these strategies resemble the kind of analysis an active manager might use, but because they're implemented through a passive indexing structure, they often retain the lower fees and potential tax efficiency associated with traditional index funds.

Factors Are Not Forever

The goal of most smart-beta and quant funds is to outperform the broader market — either by increasing returns or managing risk. But performance isn't guaranteed to persist. A factor or quantitative strategy that outperforms during one market cycle may underperform in the next. Even within a single cycle, a once-successful strategy can become neutralized or lose its edge.

For this reason, smart-beta and quant funds are typically used alongside traditional, broad-based market funds as part of a diversified portfolio — not as a replacement for them. Before investing in any fund, it's important to understand its underlying structure and objectives.

The Bottom Line: Index funds — whether traditional, smart-beta, or quant-based — can be a cost-effective, tax-efficient way to build a diversified portfolio. But "diversified" doesn't always mean what it appears to on the surface. Understanding how a fund is weighted and constructed is key to knowing what you actually own.

Have questions about how index funds fit into your portfolio strategy? Schedule a meeting with Ronald Reinstein, MBA, CDFA, Senior VP of Wealth Management.

Important Disclosures

Asset allocation and diversification do not guarantee a profit or protect against investment loss. The principal value of funds will fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.

The S&P 500 is generally considered to be representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Actual results will vary.

Funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

¹ S&P Dow Jones Indices, 2026

This content has been reviewed by FINRA.

Prepared by Broadridge Advisor Solutions. © 2026 Broadridge Financial Services, Inc.