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Rekenthaler Report

Strategic Beta Is Active Management

The same questions must be answered.

It's Indexing, but It's Not Passive
Some call the approach "smart beta," others say "factor investing." Morningstar's preferred term is "strategic beta." Whatever the label, the tactic of buying securities that have a particular feature or group of features--such as trading at a low price/book ratio, or having high price momentum over the past 12 months--has become very popular. Those who buy such funds believe that they own better betas. Their funds will beat the market.

That, of course, is the promise of active management. Strategic-beta investing is active management. Because they are typically offered through exchange-traded funds that mimic indexes, strategic-beta funds tend to be thought of as passive investments. They are not. They implement active decisions, with the promise of delivering outperformance, and should be evaluated accordingly.