The Strategic Factor of Smart Beta

LOW COST FUNDS: Morningstar analysts say not all 'smart beta' strategies are smart. Instead these benchmark trackers should be called 'strategic beta'

Ben Johnson 13 June, 2014 | 12:26PM
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“Smart beta,” “alternative beta,” “enhanced indexes,” “quantamental indexes”—at this point, the list of monikers describing the fast-growing middle of the active-to-passive spectrum extends long enough to put it just a few syllables shy of making a lunar landing. It’s an arena that has further blurred the lines between active and passive management, and one which is at the leading edge of the most recent wave of product proliferation within the global exchange-traded products (ETPs) landscape.

What Morningstar is deeming strategic beta is a broad and rapidly growing category of benchmarks and the investment products that track them. The common thread is that they seek to either improve their return profile or alter their risk profile relative to more traditional market benchmarks. In the case of equity products, which account for the overwhelming majority of assets in this arena, the result is typically one or more factor tilts relative to standard market indexes (see “Factors 101”).

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Ben Johnson

Ben Johnson  is director of passive funds research at Morningstar.