This article originally appeared in the April/May 2014 issue of Morningstar magazine.
"Smart beta," "alternative beta," "enhanced indexes," "quantamental indexes"--at this point, the list of monikers describing the fast-growing middle of the active-to-passive spectrum extends long enough to put it just a few syllables shy of making a lunar landing. It's an arena that has further blurred the lines between active and passive management (see Exhibit 1), and one which is at the leading edge of the most recent wave of product proliferation within the global exchange-traded products (ETP) landscape.
What Morningstar is deeming strategic beta is a broad and rapidly growing category of benchmarks and the investment products that track them. The common thread among them is that they seek to either improve their return profile or alter their risk profile relative to more-traditional market benchmarks. In the case of equity products, which account for the overwhelming majority of assets in this arena, the result is typically one or more factor tilts relative to standard market indexes.
