Consider Your Active Risk With Strategic-Beta Funds

These funds bet against the broad market with varying degrees of conviction.

Ryan Leggio 06 October, 2021 | 11:23
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A version of this article previously appeared in the August 2021 issue of Morningstar ETFInvestor. Click here to download a complimentary copy.

No matter how different their portfolios may look, all strategic-beta funds systematically depart from the traditional broad, market-cap-weighted index portfolio. Investors considering a strategic-beta offering must make two decisions: 1) which factor(s) they believe will beat the market and 2) how much conviction they have in that belief.

Finding a palette of funds to accommodate the first decision shouldn't cause headaches. An investor with a hunch that the quality factor is primed to outperform, for example, can locate several quality-oriented funds with relative ease. However, strategic-beta funds often fail to clearly communicate how they fit into the second decision. Different strategic-beta funds pursue their targeted factors with varying--and often unclear--degrees of intensity. Nuances in index construction separate the funds that cautiously inch away from the market from those that leave it in the rearview, illustrated here by three funds that channel the value factor with very different approaches.

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About Author

Ryan Leggio  Ryan Leggio, Esq., is a fund analyst with Morningstar.

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