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Rekenthaler Report

How Smart Is Smart Beta?

Rekenthaler visits a trendy investment concept, an NYSE proposal, one very peculiar bond fund, and The Round Mound of Rebound.

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"Smart beta" is all the rage among the smart set. Recently, a French research firm presented in Chicago on the topic the same day that AQR, a money manager with University of Chicago Ph.D. connections, visited Morningstar to discuss the very same subject. Just one day before, BlackRock announced that it was launching a series of "smart beta" exchange-traded funds.

To translate: Beta is financial academese that means "risk factor," for which an investor is (allegedly) paid. The U.S. stock market has a beta, as do Japanese bonds. "Smart" means that the beta, or risk factor, is not associated with a standard market, but rather from another source. It also implies that this beta is a particularly good one to own. The premium that comes from holding value stocks is an example of a smart beta. So, too, are the extra returns associated with owning illiquid stocks or from owning securities in less-developed countries.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.