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Morningstar launches strategic beta ETF classification system

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Morningstar has launched the first strategic beta exchange-traded product (ETP) classification system, designed to help investors better identify, compare and analyse strategic beta investment products.

Ben Johnson, Morningstar’s director of manager research for passive strategies, says: “The need to define, measure, and scrutinise the strategic beta space has increased as investors have flocked to these products and they’ve grown more complex. Investors need to undertake the same degree of due diligence when evaluating strategic beta products as they would for active investment managers. We’ve created a strategic beta classification system to help investors identify the strategies that straddle the active/passive divide.”
 
Morningstar defines strategic beta as a class of investment products that track indexes that seek to either improve performance or alter the level of risk relative to a standard benchmark, representing a fast-growing middle ground of the active-to-passive spectrum. Morningstar Direct, Morningstar Office and Morningstar Advisor Workstation, the company’s investment platforms for institutional investors and advisors, now include the new classification system and related data points. Clients of Morningstar Data will be able to license the data points later this month.
 
Clients can identify, screen, and search for ETPs at three strategy attribute levels. The system first identifies strategic beta products as the investment style, then by the strategic objective of the underlying benchmark, and then the strategic objective at a more granular level. Strategy and sub-strategy classifications include:
 
• Return-oriented: Strategies that try to improve returns or isolate a specific source of return relative to a benchmark. The strategies include: value, growth, momentum, quality, fundamentals, dividend screened/weighted, earnings weighted, revenue weighted, expected returns, shareholder yield, and multi-factor.

• Risk-oriented: Strategies that try to increase or decrease the level of risk relative to a benchmark. The strategies include: minimum volatility/variance, low/high beta, risk weighted, risk parity, maximum diversification, and de-correlation.

• Other: A wide variety of strategies, which are not return- or risk-oriented. The strategies include: equal weighted, non-traditional commodity, non-traditional fixed income, and multi-asset.
 
“Our new system for classifying strategic beta investment products will help investors understand their options and make more informed investing decisions. Because strategic beta products exhibit a variety of investment styles, the Morningstar classification system can help investors compare similar strategies and evaluate investments within the context of their traditional Morningstar category,” says Johnson.
 
The company has also published “A Global Guide to Strategic Beta Exchange-Traded Products,” its first global landscape report about strategic beta ETPs.

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