Why Do Strategic Beta ETFs Charge Higher Fees?

Smart-beta ETFs are, on average, more expensive than ETFs linked to standard market-cap weighted indexes. Morningstar analysts examine why

Morningstar ETF Analysts 23 February, 2016 | 9:38AM
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Strategic-beta, widely referred to as ‘smart beta’, exchange-traded products have seen explosive growth in recent years. According to Morningstar data, as of December 31 2015, there were 950 such products that seek to either improve return or alter risk relative to more-traditional market benchmarks, with collective assets of $478 billion worldwide.

In the past 18 months, we have published two Global Guides to Strategic-Beta Exchange-Traded Products, in which we defined the space and outlined some of the latest trends. In these reports, we highlighted the fact that strategic-beta ETPs charge higher fees, on average, relative to their more ordinary passive peers. Cost is an important consideration that isn’t always at the top of investors’ minds when selecting strategic-beta products.

Why the Higher Fees?

Strategic-beta ETFs are, on average, more expensive than ETFs linked to standard market-cap weighted indexes.

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Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure