The Pros and Cons of Advanced Beta ETFs

As the debate between active and passive rages on, many have voiced their support for a fundamental indexing or advanced beta strategy

Alastair Kellett 15 February, 2012 | 9:31AM

This is the latest in a series of pieces in which we discuss the ways new exchange traded products (ETPs) are changing the investment landscape as they attempt to improve on existing structures and strategies. Previous installments have looked at such topics as equal weighted indexing, buy-write strategies, and monthly leveraged exposures. In this one we'll examine the general characteristics of advanced beta. Subsequent articles will follow, examining at a deeper level some of the specific products that have been launched using this broad strategy type.

As the philosophical debate between active and passive management rages on, many have voiced their support for somewhat of a middle ground, namely a fundamental indexing or advanced beta strategy. This encompasses a variety of transparent, rules-based approaches to constructing a portfolio, but with constituent weights decided by factors other than market capitalisation, which tends to hold sway in most purely passive exposures.

Of course it’s not a new idea: Research Affiliates has been running fundamental index strategies since 2004. But finding new ways to put together a broad market basket has been gaining traction of late, with minimum variance and risk-weighted methodologies attracting interest. Since mid-2011, Ossiam has launched several minimum variance exchange traded funds (ETFs), most recently launching the Ossiam ETF FTSE 100 Minimum Variance (UKMV) on the London Stock Exchange. The Ossiam ETF seeks to use stocks' beta and correlation characteristics to weight them in a way that improves upon the risk/return profile of a traditional market capitalisation weighted index.

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About Author

Alastair Kellett

Alastair Kellett  is an ETF analyst with Morningstar Europe.

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