Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Ben Johnson, CFA and Jeremy Glaser | 04-20-2015 11:00 AM

Strategic Beta: Investment Fad or Opportunity?

Strategic beta funds have seen substantial inflows recently, but investors should approach them with a healthy skepticism and a keen eye on costs, says Morningstar's Ben Johnson.

Note: This video is part of Morningstar's April 2015 Active, Passive, and In-Between special report.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I am here today with Ben Johnson--he is our global director of ETF research--to take a look at the state of strategic beta exchange-traded products.

Ben, thanks for joining me.

Ben Johnson: Glad to be here, Jeremy.

Glaser: Let's start by just looking at the growth of these so-called strategic beta products over the last couple of years. What are these things and why have they become so popular?

Johnson: Strategic beta, or so-called "smart beta," represents a hybrid of active and passive. It sits in this middle ground between active and passive. Like active funds, strategic beta exchange-traded products and mutual funds track indexes that have an active bet embedded in them from the moment that their methodology is locked in. Now, like their passive parent, strategic beta benchmarks are transparent. They are investable in a rules-based manner, and they are investable at a very low cost. So, it's this combination of active and passive where we find strategic beta.

Glaser: And this has been gaining traction recently?

Johnson: Absolutely. So, if you look at the U.S. marketplace as it stands today, there is in excess of $400 billion invested collectively in exchange-traded products that we define as fitting into the strategic beta bucket. That figure has been growing at about a 20% compounded rate for a number of years now, and what we see is that it has accounted for a disproportionately large percentage of net new flows into exchange-traded products. We've seen a lot of product development in this space as well. It has grown to the point where, today, it accounts for about a fifth of the overall U.S. exchange-traded products pie.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article