Have Strategic-Beta ETFs Delivered For Investors? (Part 1)

Assessing the track records of strategic-beta ETFs across the Morningstar Categories that make up the U.S. equity Morningstar Style Box

Ben Johnson 13.07.2017
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Strategic-beta exchange-traded funds track indexes that make rules-based, active bets in an attempt to deliver better returns, less risk, or some combina­tion of the two as measured against a conventional broadly diversified, market-cap-weighted index. As of the end of May, there were 637 strategic-beta exchange-traded products listed in the U.S. that collectively held US$619 billion of investors’ assets. Here, we will assess the track records of strategic-beta ETFs across the Morningstar Categories that make up the U.S. equity Morningstar Style Box.

Success Rates
The manner we’ve chosen to measure these funds’ success—or lack thereof—mimics the methodology of Morningstar’s Active/Passive Barometer. In each of the nine categories included in this analysis, we measure individual strategic-beta ETFs’ perfor­mance relative to an equal-weighted benchmark of their category peers that track more-traditional market-cap-weighted benchmarks.1 We believe this approach is more pragmatic than sizing these funds up against a single index as it: 1) incorporates the net-of-fees (and other costs) performance of investable alternatives and 2) avoids issues that might arise from cherry-picking a single index as a yard-stick (that is to say, results may vary widely depending on the index selected as a basis for comparison). Thus, our approach reflects the real-world perfor­mance of funds available to investors and accounts for the diversity of methodologies and resulting performance profiles across seemingly similar indexes.

We compared the performance of each strategic-beta ETF that existed at the beginning of the one-, three-, five-, and 10-year periods ended March 31, 2017, to the equal-weighted performance of their more-vanilla peers. For purposes of calculating success rates, a strategic-beta ETF is considered to have succeeded if it: 1) survived to the end of the period and 2) outperformed the equal-weighted composite of its cap-weighted counterparts. The results of this exercise appear in Exhibit 1.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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