“The majority of these indexes aim to enhance returns to minimize risk relative to traditional market-capitalization-weighted benchmarks. Others try to address well-known drawbacks of standard benchmarks, such as the overweighting of debt-laden issuers to market-weighted fixed-income benchmarks,” according to Morningstar
Still, Ben Johnson, Morningstar’s director of passive funds research who presided over the panel, said “smart” and “strategic beta” actually mean the same thing. However, he prefers to use the term “strategic.” He argued that “smart beta” is a loaded term.
Strategic beta, Johnson adds, “is the melding of active and passive investing styles; it is the combination of a bet against the market is some form. But we’re doing it in a way that uses the basic elements of index funds.”
Strategic beta, he adds, is a mix of active and passive styles in which one obtains the best of both.
Whatever it is -- active or passive -- there’s no doubt that many investors are wondering about many of these terms.
Indeed, there’s nothing simple about this for the average investor, who is still trying to figure it out and needs an advisor’s help.
Luciano Siracusano, chief investment strategist at WisdomTree, doesn’t agree with Morningstar officials that smart beta is a loaded term.
“So, put simply,” in the booklet Wisdom Tree and Smart Data, “the difference between beta and smart beta may be the idea that smart data seeks to provide an exposure with the potential to outperform the market -- or generate better risk-adjusted returns than the market -- rather than merely measure the performance of all investable stocks in an equity market.”
These are the kinds of debates that apparently mystify many investors.
For example, 67 percent of investors “don’t know anything about smart beta,” said Schwab’s Davidow, but 72 percent want to understand what the term means.