A Hot Investment Style Looks Great in the Rearview Mirror

Our story thus far: After decades of expensive and often underperforming active fund management, the public has embraced low-cost, passive-index investing with a vengeance. The old chin-rubbing-this-company-looks-good school of stock picking has been hit with enormous asset outflows. Vanguard Group Inc. and BlackRock Inc. have captured trillions of dollars in new assets, tied to broad indexes, to the collective detriment of active money managers.1499880405899

Into this maelstrom of capital reallocation steps smart beta, or fundamental indexing, which straddles the line between active-stock selection and passive investing in vehicles tied to things like the Standard & Poor's 500 Index. By using other criteria for creating indexes -- historical dividend growth, earnings, price-to-sales ratios and so on -- smart-beta managers are attracting assets where other active managers are not. Morningstar data (reported by the Financial Times) shows that $866 billion is managed in this way, up 207 percent since 2012.