What is a Smart Beta ETF?

These products are touted as sophisticated and seemingly magical approaches to outperforming the market, at a fraction of the cost of active funds

Morningstar Canada 25 March, 2019 | 3:32PM

TargetsEarlier this month, Morningstar.co.uk looked at the growth of strategic or smart beta ETFs, and how these funds are growing in popularity. UK analyst Kenneth Lamont looked at how dividend strategies are still dominant. Morningstar Inc director of passive research Ben Johnson, in his overview of the global smart beta market, said that at the end of 2018, there were 1,493 strategic-beta exchange-traded products, with collective assets under management of approximately $797 billion worldwide.

But what is a smart beta ETF and how does it work? They have often been described as a blend of active and passive funds, with the outperformance of the former and the lower fees of the latter.

These products are touted as sophisticated and seemingly magical approaches to achieving alpha, or outperforming the market. These products are often managed around the idea of factors such as value, dividends, low-volatility, momentum and quality, and their historical association with higher returns.

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