Morningstar Introduces Industry’s First Strategic Beta Classification System; Publishes Global Landscape Report to Help Investors Identify, Compare, and Analyze Strategies

Chicago, IL - 18 September 2014

At its fifth annual ETF Conference, Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today introduced the industry’s first strategic beta exchange-traded product (ETP) classification system to help investors better identify, compare, and analyze strategic beta investment products. The company also published “A Global Guide to Strategic Beta Exchange-Traded Products,” its first global landscape report about strategic beta ETPs.

Ben Johnson, Morningstar’s director of manager research for passive strategies, said, “The need to define, measure, and scrutinize 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 DirectSM,Morningstar OfficeSM, and Morningstar® Advisor WorkstationSM, 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,” Johnson said.

Morningstar’s report, “A Global Guide to Strategic Beta Exchange-Traded Products,” examines trends in asset growth, asset flows, product development, and fees by region; assesses the origins of strategic beta and the various types of risk that these strategies look to control; and provides a practical guide to analyzing strategic beta ETPs.

Key highlights of the landscape report include:

• As of June 30, 2014, Morningstar identified 673 strategic beta ETPs in its database, representing approximately $396 billion in assets worldwide. 
• Strategic beta ETPs account for 19 percent of U.S. ETP assets and just 1.5 percent of ETP assets in the Asia-Pacific region.
• Dividend screened/weighted ETPs have the most assets among strategic beta investment products in every region—United States, Canada, Europe, and Asia-Pacific—examined in the report.
• There is a positive correlation between the adoption rate of strategic beta ETPs and the stage of development of a region’s ETP market and its asset management industry at large.
• Strategic beta ETPs tend to charge expense ratios that are more competitive than their comparable actively managed peers, though in some cases only marginally lower.

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