Are Smart Beta ETFs Any Good?

Are strategic beta funds – also known as smart beta – any good compared to plain vanilla ETFs? And how do they fare compared to actively managed funds?

James Gard 9 August, 2017 | 4:01PM

Smart beta funds are well established in the US, with $636 billion of assets under management, 10 times bigger than the equivalent European market. But these hybrid offerings are already gaining traction on this side of the Atlantic with professional advisers and investors – and we believe that where the US leads, the rest of the investing world will surely follow.

But are strategic beta funds – also known as smart beta – any good compared to plain vanilla ETFs? According to Morningstar’s head of passive fund research, Ben Johnson the short answer is No – although those tracking larger cap indexes perform better than funds following indexes of smaller-sized companies. His analysis chimes with the views of legendary Vanguard founder Jack Bogle, who gave a damning appraisal of strategic-beta funds in a Morningstar interview last year.

Strategic-beta exchange-traded funds track indexes that make active bets in an attempt to deliver better returns, less risk, or some combina­tion of the two, as measured against a market-capitalisation weighted index. Beta refers to how closely a particular fund or stock tracks an index; most investors can track this simply in a low cost way. But others want funds that outperform the market without paying the higher costs associated with active fund management.

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About Author

James Gard  is content editor for Morningstar.co.uk

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