Specialists in the stock market what is beta meaningful

By: valsha Date of post: 04.07.2017

Return-oriented strategies look to improve returns relative to a standard benchmark. Value- and growth-based benchmarks are prime examples of return-oriented strategies. Other return-oriented strategies seek to isolate a specific source of return. Meanwhile, risk-oriented strategies look to either reduce or increase the level of risk relative to a standard benchmark. Low-volatility and high-beta strategies are the most common examples of risk-oriented strategies. Lastly, "other" encompasses a wide variety of strategies, ranging from nontraditional commodity benchmarks to multiasset indexes.

This second cut allows investors to classify strategic beta instruments along very broad lines. The Devil Is in the Details The third and final cut involves classifying products with similar strategic objectives at a more granular level.

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This is intended to facilitate more-precise comparisons between products with very similar underlying methodologies. Exhibit 2 outlines our strategic beta taxonomy in full detail. A Look at the Numbers Overlaying our taxonomy on the U. ETP market yields some interesting results.

First, this universe has seen tremendous growth over the past decade. The rate of growth has only accelerated in the past five years. At the end of , Morningstar counted strategic-beta ETPs in the United States. Also, this is a category that has been punching above its weight.

Exhibit 4 shows the breakdown of strategic beta ETP assets and their share of flows for along the lines of the secondary strategy attributes outlined above. ETPs offering access to dividend-screened or weighted strategies are the largest class of strategic beta ETPs. It should come as little surprise in the context of what has been a yield-starved market environment that dividend strategies have grown to account for nearly one third of assets in this space.

There are also some notable up-and-comers in the space. Fundamentally weighted strategies have been gaining traction as many of the ETPs tracking them now have track records of three-plus years, a fact that has bolstered some investors' confidence in their merit. What comes next in the land of strategic beta is more complexity.

The latest wave of new products hitting the market is of the multifactor variety, combining a range of factor tilts or exposures into one fund. These products are peeking over the fence that stands at the border between active and passive--mimicking active strategies in a rules-based, transparent, tax-efficient, and low-cost manner.

This layering of complexity adds to the due-diligence burden for investors. Investors' due-diligence processes for these funds need to be every bit as rigorous as those they would undertake in scrutinizing active managers.

Morningstar believes that its taxonomy is an important first step in the direction toward helping investors to better understand the strategic beta universe.

Morningstar's global manager research team recently published "A Global Guide to Strategic-Beta Exchange-Traded Products," its first global landscape report about strategic-beta ETPs. The report examines trends in asset growth, asset flows, product development, and fees by region; assesses the origins of strategic beta and the various types of risk that these strategies look to control; and provides a practical guide to analyzing strategic-beta ETPs. Below is an excerpt from this report; investors can download the complete report here.

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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 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.

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As new products have continued to roll off asset managers' assembly lines, their sales and marketing departments have been working tirelessly to position these new models within an increasingly competitive field. The result has been a ratcheting up of the level of complexity of the indexes that form the raw stuff of these benchmark-based investment products and, in some cases, a growing disparity between how they are pitched by their sponsors and the actual investment results they produce.

Investors are faced with a complex task as they navigate this landscape, and Morningstar is working to provide the compass they need to do so. A Brief Historical Detour The proverb "There is nothing new under the sun" applies to this "new" corner of the asset-management arena.

Academics distilled investment returns into their component factors decades ago. And others, most notably the eponymous founder of Barr Rosenberg Associates, had recombined these basic drivers of investment returns into investable products.

In fact, Rosenberg's "bionic betas" landed him on the cover of the May issue of Institutional Investor magazine. So why is this time different? First, there have been major advances in information and investment technology since the mids that have given asset managers the horsepower necessary to efficiently manage more-complex index strategies, to repackage them into the newest generation of strategy-delivery vessels such as ETPs , and to deliver them at a low cost to investors.

The past four decades have also been marked by steady secular growth in index investing. Since the first index fund was launched in , the portion of U.

All told, the investment world of today is far more ready for these sorts of strategies than it was 40 years ago, when some people, as John Bogle has reported, were calling the concept of indexing "un-American. What's in a Name? The need to define this space, to measure it, and to police it has grown and will continue to grow with time. At Morningstar, we are positioning ourselves to meet these needs, all with the goal of helping investors make better-informed investment decisions.

For our part, we have decided to tag this realm with the label strategic beta. First and foremost, we are eager to do away with the positive connotations that may be inferred by the "smart" in smart beta. Not all of the strategies included in this arena are smart, per se. The term strategic is meant to draw attention to the fact that the benchmark indexes underlying the ETPs, mutual funds, and other investment products in this space are designed with a strategic objective in mind.

These objectives primarily include attempting to improve performance relative to a traditional market-capitalization-weighted index or altering the level of risk relative to a standard benchmark.

specialists in the stock market what is beta meaningful

As for the beta in the name, it is not meant to imply beta in the strictest, most academic sense of the term a measure of a security or portfolio's sensitivity to movements in the broader market.

Instead, it is to highlight the fact that this is a group of index-linked investments, all of which have the goal of achieving a beta equal to 1 as measured against their benchmark indexes. Strategic beta may not roll off the tongue as easily as smart beta, but we believe it is a more accurate descriptor--one that doesn't imply that this universe is the index world's equivalent of Lake Woebegon.

It should be noted that these are merely attribute tags and not new fund categories, just as we do not have a "passive" or an "active" category. The portfolios of strategic beta funds exhibit a variety of investment styles.

Our purpose in creating these descriptions is to help investors rigorously analyze this breed of funds, facilitating comparisons between those with similar strategies as well as within the context of their traditional Morningstar category.

A Motley Crew In delineating the boundaries of the strategic beta space, we have tried to be as inclusive as possible, including products that may have a variety of different processes but yield fairly similar end products, and all of which deviate in some meaningful way from their traditional broad-based index peers.

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Others have adopted a more narrow definition that excludes any products based on benchmarks whose constituents are market-cap-weighted. The common elements among them:. Membership Home Portfolio Stocks Bonds Funds ETFs CEFs Markets Tools Real Life Finance Discuss. What You Need to Know About 'Strategic Beta'. As a growing number of new ETFs straddle the line between active and passive, investors are faced with a dizzying array of increasingly complex choices.

Here's the compass you need to navigate. Print Comment Recommend -. Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.

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specialists in the stock market what is beta meaningful

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